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

The Japanese yen weakened to 157.73 per US dollar on Tuesday, marking a departure from last week's peak prior to the Bank of Japan's policy announcement. This decline came amid a risk-on atmosphere and a weaker euro, ahead of major central bank meetings this week that could impact the global interest rates outlook. The yen continued its downward trend from Monday, as the Bank of Japan prepared to maintain interest rates at 1.25% during its two-day meeting concluding on Friday, while hinting at potential further rate hikes in response to rising price pressures.

Japan's service-sector inflation increased 3.7% in September compared to a year ago, indicating mounting cost pressures that may prompt additional interest rate increases from the central bank. Analysts from MUFG anticipate the Bank of Japan will determine that consumer price inflation aligns with its 2% price stability target, but they cautioned that the bank will now focus on monitoring risks on both sides of the spectrum.

The yen was among the top-performing major currencies last week due to market jitters surrounding artificial intelligence in the equity market, which prompted a "safe haven" rush into the currency. While analysts at Ebury maintain their belief in another rate hike by the BOJ at the year's final meeting, the likelihood of this occurring remains uncertain.

Apart from the Bank of Japan, four other prominent central banks will unveil their policy decisions this week. The Federal Reserve, expected to skip a rate hike during its meeting concluding on Wednesday, was followed by the European Central Bank, which decided to maintain rates at 2.5% on Thursday. The US dollar, buoyed by a tech-driven rebound on Wall Street and revived risk appetite, held steady near a one-week high at 102.04.

The dollar index was supported by a weaker euro, which fell to a near two-week low of 1.1165 against the greenback as concerns over France's fiscal situation put pressure on the single currency. Concerns about financial instability in the euro zone were reignited by the sharp decline in French government bonds, pushing the country's debt-risk premium to its highest level since the 2011 sovereign debt crisis.