Following the BOJ change, the dollar declines while the yen climbs. Is a dovish posture the best course of action?
After the Bank of Japan shocked markets with a change in policy, clearing the way for the end of the nation’s ultra-accommodative monetary policy, the U.S. dollar dropped and the Japanese yen rose.
The Dollar Index, which compares the dollar to a basket of six other currencies, decreased 0.5% to 103.868 at 03:25 ET (08:25 GMT).
As was generally anticipated, the Bank of Japan kept its benchmark interest rates close to zero, but it also increased the yield fluctuation range for its benchmark government bonds from a range of minus 0.25% to 0.25% to between negative 0.5% and 0.5%.
Related: The dollar goes up as the Fed says more rate hikes are coming.
Following the unexpected action considered a foreshadowing of the BOJ finally tightening policy and eliminating the remaining ultra-dovish attitude in the developed world, as consumer inflation jumped to a 40-year high in November, USD/JPY plummeted 3.3% to 132.40, plunging to a 4-month low.
The yen has experienced a significant decline this year, partly due to a widening disparity between domestic and U.S. interest rates. As a result, the Bank of Japan was compelled to act to maintain its currency in October.
Additionally, the euro continued to benefit from the hawkish tone expressed by the European Central Bank this week as EUR/USD increased 0.1% to 1.0612.
In a note, analysts at ING stated that the ECB would “clearly like a stronger euro to help out with its battle against inflation” and that it was “telling” that President Christine Lagarde was keen to emphasise that the ECB would be tightening longer than the Fed at last week’s ECB press conference.
However, the German producer price index declined in November for the second consecutive month, adding to indications that Europe’s biggest economy may be exiting a period of high inflation.
Industrial product producer prices increased 28.2% over the same month last year, compared to a 34.5% increase in October, declining 3.9% from October.
GBP/USD traded almost unchanged at 1.2146 as the nation struggled to contain a wave of strikes by workers who want pay increases to offset inflation that is approaching 40-year highs.
According to ING, “given that the Bank of England (BoE) is closer to concluding its tightening cycle than the Fed and that the UK’s substantial current account deficit leaves sterling vulnerable in a global slowdown,” sterling might be the primary victim of any euro rise.
Related: Asian stocks fall along with the dollar because the Fed is becoming more aggressive and China’s COVID is worried.
While the People’s Bank of China kept its core lending rate at historic lows, the risk-sensitive AUD/USD lost 0.5% to 0.6666 and the USD/CNY dipped 0.1% to 6.9730.