Yen Surges on Ueda's Remarks; Dollar Sinks Ahead of US Inflation Print

CURRENCY - SINGAPORE. The yen jumped on Monday as comments from Bank of Japan (BOJ) Governor Kazuo Ueda stoked hopes that Japan could soon herald a new era away from negative rates, while the dollar slid ahead of this week's key U.S. inflation reading.

The Japanese currency strengthened more than 1% to touch a one-week high of 145.99 per dollar, boosted by weekend comments from Ueda that the central bank could end its negative interest rate policy when achievement of its 2% inflation target is in sight.

Ueda told the Yomiuri newspaper in an interview that the BOJ could have enough data by year-end to determine whether it can end negative rates.

The yen has come under immense pressure against the dollar as a result of growing interest rate differentials with the United States since the Federal Reserve began its aggressive rate-hike cycle last year while the BOJ remains a dovish outlier.

"It seems that Ueda's comments were intended to stop the yen's slide against the dollar," said Takehiko Masuzawa, trading head at Phillip Securities Japan. "His comments are working almost the same as government intervention."

Since the yen weakened past the key 145 per dollar threshold last month, traders have been on alert for any signs of intervention from Japan to shore up the currency. A year ago, that level had prompted the first yen-buying intervention by the authorities since 1998.

In the broader currency market, the greenback tumbled ahead of U.S. inflation data due on Wednesday, with traders on the lookout for whether the world's largest economy is indeed on track for a "soft landing", and whether the Fed has further to go in raising rates.

Sterling jumped nearly 0.5% against the dollar to stand at $1.2523, distancing itself from a three-month low hit last week.

The euro similarly gained 0.36% to $1.0738, after having ended Friday with an eight-week losing streak.

The dollar index, which capped last week with eight straight weeks of gains, fell 0.31% to 104.53.

Christopher Wong, a currency strategist at OCBC, attributed the dollar's slide to traders "lightening up" on their long dollar positions ahead of the inflation print.

The greenback, along with U.S. Treasury yields, had surged last week after a run of resilient economic data added to bets that further rate hikes from the Fed may be on the horizon.

"The overall global economy is not booming, but neither is it on the verge of recession, and the U.S. appears to be doing the best among the major economies," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

TURN OF TIDE?

In Asia, the onshore yuan pulled away from Friday's 16-year low after China's central bank on Monday set the daily midpoint guidance with the strongest bias on record, signalling increasing discomfort with the currency's recent weakness.

It was last nearly 1% higher at 7.2766 per dollar, while its offshore counterpart similarly surged about 1% to 7.2956 per dollar.

China's consumer prices returned to positive territory in August while factory-gate price declines slowed, data over the weekend showed, pointing to easing deflationary pressures amid signs of stabilisation in the economy.

"Historically, we do not see China's inflation print negative numbers for very long, although I thought we might at least get a few more deflationary figures than the single one served," said Matt Simpson, senior market analyst at City Index.

Separate data on Monday showed that Chinese banks extended 1.36 trillion yuan ($186.18 billion) in new yuan loans in August, up sharply from July and beating analyst expectations.

Against the weaker U.S. dollar, the Aussie and the New Zealand dollar were among the biggest beneficiaries, each rising close to 1% to hit roughly one-week highs.

The Australian dollar jumped 0.95% to $0.6439, while the kiwi rose 0.79% to $0.5930.