Yen faces worst monthly drop since July as BOJ disappoints

By Karen Brettell NEW YORK (Reuters) -The Japanese yen was heading for a monthly loss against the U.S. dollar on Friday after the Bank of Japan disappointed traders hoping for a more hawkish stance on future rate hikes, while the Federal Reserve dampened expectations for a December rate cut. The yen clawed back some losses on Friday after Japanese Finance Minister Satsuki Katayama said that the government has been monitoring foreign exchange movements with a high sense of urgency as the yen weakens. Core inflation in Japan's capital also accelerated in October and stayed above the central bank's 2% target, data showed on Friday. But disappointment after Bank of Japan Governor Kazuo Ueda adopted a less-hawkish tone on future rate hikes than hoped as the Japanese central bank kept rates on hold at 0.5% on Thursday limited gains.  Noel Dixon, global macro strategist at State Street Global Markets, says he remains constructive on the yen, saying that “the BOJ ultimately is still going to have to normalize policy at least to 1%.” “From a multi-year perspective, wages are definitely higher than they've been… and the fiscal spending is only going to exacerbate that prospect,” Dixon said. Japan’s newly elected leader Sanae Takaichi is expected to pursue more fiscally expansive policies to boost economic growth. The yen was last up 0.09% against the greenback at 153.96 per dollar. It is heading for its worst month since July, with the dollar up 4.1% against the currency this month.  The dollar index rose 0.28% to 99.75 and is on track for a 2% monthly gain, its best since July. The greenback has been boosted by more optimism over the economic outlook even as the labor market weakens, while Fed policymakers remain concerned about inflation. Fed Chair Jerome Powell said on Wednesday that a policy divide within the U.S. central bank and a lack of federal government data may put another interest rate cut out of reach this year.  “It sounded like he was just trying to give himself some optionality,” said Dixon. The Fed cut rates  on Wednesday, as expected, though two policymakers dissented. Governor Stephen Miran again called for a deeper reduction in borrowing costs, while Kansas City Fed President Jeffrey Schmid favored no cut. Schmid said on Friday that he dissented out of concern that continued high inflation and signs of price pressures spreading in the economy could raise doubts about the central bank's commitment to its 2% inflation target. Fed funds futures traders are now pricing in a 63% probability of a cut in December, down from 92% a week ago, according to the CME Group’s FedWatch Tool.  Dixon said he expects the dollar index to consolidate under technical resistance at around 102, before gaining next year when growth is likely to accelerate.  “From a positioning standpoint, it's clear that investors, at least from a real money perspective, are maxed out from a short perspective, so I think it's difficult to short it,” he added. The euro fell 0.27% to $1.1534 after the European Central Bank kept interest rates unchanged at 2% for the third meeting in a row on Thursday and repeated that policy was in a "good place" as economic risks recede. The euro has fallen 1.7% this month, as the dollar gains broadly. Sterling fell 0.28% to $1.3113, the lowest since April 14, as political pressures grew surrounding British Finance Minister Rachel Reeves. Against the euro, the pound reached its weakest since May 2023. The pound is heading for a 2.5% drop this month, while gilt yields have dropped on concern over what Reeves' November budget might mean for businesses, households and overall economic activity. Traders are also pricing in rising odds of a Bank of England interest rate cut, though the British central bank is viewed as most likely keeping rates on hold when it meets next week. In cryptocurrencies, bitcoin gained 2.37% to $110,080.   (Reporting by Karen Brettell; Additional reporting by Amanda Cooper and Gregor Stuart Hunter; Editing by Chizu Nomiyama and Andrea Ricci )

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