Yen eases on risk-on mood ahead of central bank bonanza

The Japanese yen weakened against the US dollar on Tuesday, driven by a risk-on sentiment and a weaker euro ahead of major central bank meetings. The yen fell 0.1% to 157.66 per dollar, moving away from its one-month high reached last week. Traders were watching the Bank of Japan's policy decision later this week, as the central bank signaled readiness to continue raising borrowing costs amid rising price pressures.

Japan's service-sector inflation rose 3.7% in September from a year earlier, indicating increasing pressure that may push the bank for further interest rate hikes. Currency strategist Moh Siong Sim said that if the bank declares inflation has met its target, it would signal a stronger move toward normalization, albeit gradually.

The yen had been the best-performing major currency last week, as AI jitters in the equity market led to a rush into the currency. While it's too early to consider AI a market theme, it could become more significant next year, potentially pushing the yen higher. The yen's value as a hedge is likely to increase in the future, partly due to the Bank of Japan's tightening and potential reallocation of domestic assets by Japanese investors.

Markets priced a slightly better-than-even chance of a December BOJ hike, giving room for a potential rebound if Governor Ueda strikes a hawkish tone. Apart from the BOJ, other central banks would announce policy decisions this week, including the Federal Reserve, which is expected to skip a hike, the European Central Bank, and the central banks of New Zealand and Canada, all of which are anticipated to raise rates.

The dollar index stayed near a two-week high at 102.11 on Tuesday, buoyed by renewed risk appetite after Anthropic's IPO filing and Meta's $95 billion equity plan rekindled interest in artificial intelligence. The dollar was also supported by a weaker euro, which fell to a near two-week low against the greenback as concerns over France's fiscal health added pressure on the currency.