The Japanese yen (JPY) extended its weakening trend on Tuesday, hitting a fresh 34-year low against the U.S. dollar (USD) during the early European session. This was driven by the Bank of Japan’s (BoJ) dovish outlook, as the central bank refrained from providing any guidance on future policy steps or the pace of policy normalization after ending negative interest rates in March.
Read more: Bank of Japan to cut monetary stimulus if inflation nears 2 percent
Dovish BoJ outlook fuels yen weakness
A report on Monday suggested that the BoJ will place less emphasis on inflation and shift to a more discretionary approach, allowing various data to guide the future rate hike path. This was seen as a key factor continuing to undermine the JPY, which, coupled with some follow-through USD buying, lifted the USD/JPY pair to levels just above the mid-154.00s.
The incoming U.S. macroeconomic data pointed to sticky inflation and a still-resilient economy, forcing investors to push back their expectations for the first interest rate cut by the Federal Reserve (Fed) to September from June. This suggests that the large difference in rates between the U.S. and Japan will persist for some time, potentially driving flows away from the JPY and supporting prospects for a further near-term appreciation of the USD/JPY pair.
The JPY bears, however, remain on alert and might refrain from placing fresh bets amid recent warnings by Japanese authorities that they are prepared to intervene in the market to prop up the domestic currency. Additionally, the worsening Middle East crisis could limit losses for the safe-haven JPY and cap the currency pair.
The yen weakened on Monday, pushing the dollar to its highest against the Japanese currency since June 1990, as markets remained alert to any signs of intervention from the Japanese authorities to support the yen.
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