Yen strengthens amid BoJ and Fed decisions

The yen overcame early declines and rose on Monday, but investors were still hesitant after the Japanese currency's biggest weekly gain since late April, when a tech-driven slump in U.S. stocks fuelled demand for safe-haven assets. Investors were hesitant after the Japanese currency's biggest weekly rise since late April, after a technology-driven fall in U.S. stocks fuelled demand for safe-haven assets. Traders are watching Wednesday's monetary policy decisions by the Bank of Japan and the U.S. Federal Reserve for further guidance. Growing speculation of a rate hike by the Bank of Japan this week has boosted the yen, while the Fed is expected to pave the way for a rate cut in September.

Investors also feared increased geopolitical volatility as Israel weighed a response to a deadly rocket attack on the Israeli-occupied Golan Heights in Syria, which Israel and the U.S. blamed on the Lebanese armed group Hezbollah. The dollar lost 0.14% to trade at 153.51 yen, after falling 0.49% and at one point being on the verge of 153 yen. The U.S. currency rose 0.36% early in the day as Friday's rally in global stock markets continued Monday in Asia, with Japan's Nikkei index rising more than 2%. On Thursday, the dollar fell to 151.945 for the first time since May 3, ending the week down 2.4%. "The dollar's rally against the JPY seems to have paused" after the news from Israel, although the reason is unclear, said Shinichiro Kadota, currency and rates strategist at Barclays in Tokyo: "Confidence remains fragile. Ultimately, the key factor remains U.S. equities," Kadota added. 'Market moves have been driven by US equities and we need to see if things stabilise there. This week's US earnings calendar is full of heavyweights such as Amazon, Apple, Meta and Microsoft.

Currency traders will also have to face not only the Bank of Japan and the Federal Reserve on Wednesday, but also the Bank of England a day later. There is a lot of speculation that the Bank of Japan will raise interest rates on Wednesday while significantly reducing its monthly bond purchases. At its previous meeting last month, the BOJ promised to outline its plans for quantitative tightening at this meeting. On the other hand, the Fed is expected to leave rates unchanged this week but cut them by a quarter point at its next meeting in September. "USD/JPY was overvalued but now momentum is against this currency pair," said Christina Clifton, economist and chief currency strategist at Commonwealth Bank of Australia.

The Federal Open Market Committee (FOMC) decision is a big event and the risks to USD/JPY are asymmetric, she said. "Any hint of easing by the FOMC could lead to a significant decline in USD/JPY, but the FOMC's hawkishness is unlikely to have much impact," the Fed added. The dollar index, which measures the currency against the yen, euro, sterling and six other major pairs, fell 0.1% to 104.27 points. The euro was down 0.06% to 166.76 yen, little changed at $1.0858. The pound exchange rate remained steady at 84.35 British pence, not far from Friday's high of 84.48 pence, the highest since 10 July. Sterling rose 0.07% to $1.2875.

Markets view the chances of the Bank of England's first rate cut on Thursday as a coin toss: Interest rate futures show a 50% chance of a cut, although most economists polled by Reuters believe there will be a cut. Meanwhile, the Australian dollar rose 0.07% to $0.6562, trying to recover from Friday's low of $0.65105, a level it hasn't reached since early May. The main cryptocurrency, bitcoin, rose 3.35% to $69,700, gaining some support from positive comments from Republican presidential candidate Donald Trump, who said at a bitcoin conference on Saturday that the United States must dominate the sector or China will.