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

The Japanese yen weakened to 157.73 per dollar on Tuesday, further distancing itself from its one-month high reached last week before the Bank of Japan's policy decision. This decline occurred amid a risk-on mood and a weaker euro. The Bank of Japan is scheduled to maintain interest rates at 1.25% during its two-day meeting, slated to conclude on Friday, while signaling its readiness to persist with further interest rate hikes due to rising price pressures.

The gauge of Japan's service-sector inflation increased by 3.7% in September compared to a year ago, indicating mounting inflationary pressures that may compel the central bank to continue raising borrowing costs. Analysts at MUFG anticipate the Bank of Japan will conclude that the underlying rate of consumer price inflation aligns with its 2% price stability target.

However, they caution that merely reaching the target is insufficient and that the Bank will now focus on monitoring risks from both sides. The yen experienced significant gains last week due to AI-related market jitters, leading to a surge in safe-haven demand. While there is a slight probability of a December Bank of Japan rate hike, the possibility of a rebound in the yen remains open if Governor Ueda adopts a hawkish stance.

Apart from the Bank of Japan, four other major central banks will unveil their policy decisions throughout the week. The Federal Reserve is expected to skip a rate hike during its two-day meeting on Wednesday. The European Central Bank will maintain its interest rates unchanged at 2.5% on Thursday, while New Zealand and Canada's central banks are anticipated to raise rates during the week.

The dollar index maintained its position near a one-week high at 102.04 on Tuesday, buoyed by a tech-led rally on Wall Street, which reignited interest in risk assets. The dollar also received support from a weaker euro, which fell to near two-week lows against the US currency following concerns over France's fiscal health and its impact on the single currency.

The euro dropped to US$1.1165, marking a decline of around 1.4% this month. Meanwhile, the Brazilian real stabilized after experiencing a sharp depreciation against the US dollar following President Luiz Inacio Lula da Silva's historic fourth-term victory in the recent election.