Euro to the fore, yen on backfoot, as policy meetings loom

The yen was on the backfoot on Tuesday as Japan’s new central bank chief signalled patience on any monetary tightening while the euro climbed on prospects of a 50 basis point interest rate hike for the common currency bloc at next week’s policy meeting, Reuters reported.

The dollar also struggled to make meaningful gains in Asia as fresh bank jitters had traders expecting U.S. interest rate cuts before long.

The euro rose above $1.10 overnight and was still going strong at $1.1056 in Asia. Trade was thinned by holidays in Australia and New Zealand and ahead of central bank meetings in Japan on Friday and the U.S. and Europe next week.

European Central Bank (ECB) board member Isabel Schnabel told Politico that a 50 bp rate hike was not off the table and would depend on data – notably inflation figures due two days before May’s meeting.

French ECB policymaker Francois Villeroy de Galhau seemed to have a different view, calling for further hikes to be limited in number and size in an interview with Le Figaro, but markets have focused on the fact that still more hikes are expected.

Futures pricing implies about a 2/3 chance of a 25 bp ECB hike and a 1/3 change of a larger 50 bp rise. “It’s not fully priced in yet, so if the ECB does go 50 then it will be euro supportive, I think that’s what’s being reflected in the market,” Bank of Singapore currency strategist Moh Siong Sim said.

The euro has also hit an eight-year high at 148.47 yen as new Bank of Japan new governor Kazuo Ueda has been signalling he is not in a hurry to shift policy.

This week’s BOJ meeting, which concludes on Friday, is his first in charge. According to Electronic Broking Services data stretching back to the early 2000s, the yen is also at its lowest on the Swiss currency in two decades at 151.35 per franc.

The yen was steady on the dollar and last traded at 134.28 per greenback. News overnight of plunging deposits at First Republic Bank in the U.S. served as a reminder that stability risks have not entirely died down and prompted traders to renew expectations that the Fed shifts quickly from hiking to cutting. Fed funds futures imply about an 88% chance of a hike next week, followed by some 50 bps of cuts by year end.

The U.S. dollar index dropped 0.4% overnight and hit a 10-day low of 101.19 in early Asia trade. The Australian dollar was a shade softer at $0.6676 as traders waited for inflation data due on Wednesday.

The New Zealand dollar, which has been under pressure since surprisingly soft inflation figures last week, bounced a bit overnight and held at $0.6170 on Tuesday, just above its 200-day moving average.