Yen slips ahead of central bank bonanza, dollar firms on tech rebound

The Japanese yen weakened against the US dollar on Tuesday, continuing the decline from last week's safe-haven gains. This decline was driven by a risk-on sentiment and a weaker euro ahead of crucial central bank meetings this week that will impact the global rates outlook. The yen slipped to 157.73 per dollar, moving further away from its one-month high last week just before the Bank of Japan's policy decision later in the week.

The Bank of Japan (BOJ) is expected to maintain interest rates at 1.25% during its two-day meeting concluding on Friday, but hints at potential further interest rate hikes due to rising price pressures. Japan's service-sector inflation index increased by 3.7% in September compared to a year ago, indicating growing price pressures that may keep the central bank on track for additional interest rate increases.

Analysts at MUFG anticipate the BOJ will conclude that the underlying rate of consumer price inflation aligns with its 2% price stability target. However, they suggest the central bank will transition from focusing on downside inflation risks to monitoring risks in both directions. The yen was among the top-performing currencies last week due to AI concerns in the equity market fueling a safe-haven bid for the currency.

There is substantial potential for a yen rebound if Bank of Japan Governor Ueda adopts a hawkish stance, according to Ebury analysts. While the dollar index remained stable near a one-week high at 102.04, a tech-driven rally on Wall Street rekindled risk appetite as investors await major corporate earnings and the US midterm elections.

The dollar was supported by a weaker euro, which hit a near two-week low against the greenback due to concerns over France's fiscal health, leading to heightened financial stress across the euro zone. Brazilian real stabilized after experiencing sharp declines against the US dollar following President Luiz Inacio Lula da Silva's historic fourth term victory on Sunday, surpassing Senator Flavio Bolsonaro, Jair Bolsonaro's eldest son.