Asian currencies slip as yen pulls back, Fed and BOJ decisions loom

Asian currencies declined on Tuesday as the Japanese yen retreated from a seven-month high, while traders prepared for the Bank of Japan's upcoming interest rate decision and the Federal Reserve's policy statement later in the week. The U.S. dollar index edged closer to a two-week peak as oil prices climbed and Treasury yields rose, signaling a possible Fed rate hike.

The EUR/USD and GBP/USD pairs both slipped, while the yen's USD/JPY pair rose, leaving the yen below its recent high. Markets view a 25-basis-point BOJ rate hike on Friday as likely, keeping the currency sensitive to signals of further tightening. The Fed is now widely expected to raise rates on Wednesday, but its next move may depend on whether the door to additional tightening remains open.

Oil price increases have fueled pressure on currencies of oil-importing nations, including the Australian, New Zealand, South Korean, and Malaysian currencies. Indonesia's rupiah also weakened after the president replaced the finance minister with a vice finance minister. DBS Senior Economist Radhika Rao said the initial market response was expected to be constructive, with fiscal credibility supporting bond markets and currencies, though elevated yields are likely to persist as they track U.S. bond markets.