By Alden Bentley, Alun John and Tom Westbrook
NEW YORK/LONDON/SINGAPORE (Reuters) – The dollar fell to its lowest in more than two months against the yen on Wednesday as short-yen carry trades were unwound ahead of next week’s Bank of Japan meeting, with investors girding for a hawkish move to begin removing monetary stimulus.
The yen also rose to its highest since mid-May against the euro.
The dollar index, which measures the greenback against a basket of six currencies including the yen and the euro, was off 0.34% at 104.12. It briefly pared losses after S&P Global said that its flash U.S. Composite PMI Output Indextracking the manufacturing and services sectors edged up to 55.0 this month, the highest level since April 2022.
The main macro news of the week comes Thursday with the first estimate of U.S. second quarter GDP and Friday with the Personal Consumption Expenditures Price Index, which the Federal Reserve relies on to gauge inflation.
Sources said the Japanese central bank is likely to debate at its July 30-31 meeting whether to raise interest rates, and unveil a plan to roughly halve bond purchases in coming years.
The Fed holds its meeting the same days and, while few expect it to begin lowering rates this month, there is a good chance the messaging for a pivot in September will become stronger, given months of declining inflation and slower growth.
Over three-quarters of economists polled by Reuters expect the BOJ to stand pat this month and possibly next move in September or October, but sources suggested the outcome of the July 30-31 meeting was considerably less certain.
Recent rounds of suspected currency intervention have speculators rushing to close what had been profitable carry trades, where they borrowed in low-yielding yen and invested in assets of currencies with higher interest rates.
The dollar fell 1.56% to 153.16 yen, hitting its lowest since May 6. The euro marked its lowest price since May 8 and was down 1.36% at 166.56 yen.
The yen is the best performing G-10 currency against the dollar in July so far.
“Even if the BOJ delivers something that’s not quite as hawkish as the markets are now expecting, there is still the risk that the Ministry of Finance could step in and prevent weakness in the yen if it should occur,” said Brian Daingerfield, FX strategist at NatWest Markets in Stamford, Connecticut.
“There is of course the reality that the Fed appears to be closing in on the potential to start an easing cycle of its own here.”
The euro was up 0.08% at $1.086. Sterling strengthened 0.19% to $1.293.
Commodity-linked currencies fell to multi-week lows. Oil prices are at their lowest in a month and a half and industrial metals like iron ore and copper hit 3-1/2-month lows on a gloomy outlook for Chinese demand.
The Australian dollar fell as much as 0.5% and at $0.6599 was near a low hit in early June.
The Canadian dollar weakened 0.12% to 1.38 against the U.S. dollar.
The New Zealand dollar weakened 0.25% to US$0.5943, trading at levels last seen in early May.
“We’re seeing softer demand in China and Asia in general and the kiwi and Aussie just being pulled down,” said Jason Wong, senior markets strategist at BNZ in Wellington. (This story has been refiled to correct the spelling of the name ‘Daingerfield’ in paragraph 11)
This post is originally published on INVESTING.
