Yen’s Strong Rebound
On Friday, the yen surged as much as 1% to a six-week high of 150 per dollar, driven by faster-than-expected inflation data from Tokyo. The stronger inflation numbers bolstered market expectations that the Bank of Japan (BOJ) might raise interest rates next month.
Meanwhile, trading activity was thin due to the U.S. Thanksgiving holiday, and the dollar weakened against most major peers. The British pound climbed to its highest level since November 20, while the euro recovered from a small dip and moved closer to a one-week high reached earlier in the week.
Global Currency Market Trends
The dollar index fell by 1.5% this week, despite its strong performance earlier in November when it gained over 2%. This builds on its 3% surge in October, driven by Donald Trump’s victory in the November 5 election. Markets anticipated Trump’s policies to include increased fiscal spending, higher tariffs, and stricter border controls, which are viewed as inflationary.
German consumer price data released on Thursday showed no growth, contrary to expectations of a second consecutive increase. Additionally, dovish remarks from a European Central Bank official and budget disputes in France weighed on the euro’s performance.
Drivers Behind BOJ Rate Hike Speculation
The yen’s recent strength has been fueled not only by the dollar’s weakness but also by safe-haven flows amid heightened global economic uncertainties. Market bets on a BOJ rate hike in December have also gained traction. Traders currently assign a 60% probability to a 25-basis-point hike, and over half of economists in a recent survey predict the same outcome.
Adding to the case for a rate hike, Tokyo’s core consumer price index (CPI), which excludes volatile fresh food prices, rose 2.2% year-over-year in November. This exceeded the market forecast of 2.1% and marked a notable increase from October’s 1.8%. These figures suggest inflationary pressures in Japan may be gaining momentum.
Uncertainty Around Rate Hike Decisions
Despite rising expectations, some analysts argue that the BOJ might maintain its current policy stance. They highlight that while Tokyo’s service consumption has gradually improved, it remains insufficient to drive significant inflationary pressures. Moreover, spending on non-durable goods continues to decline, indicating that demand-driven inflation has yet to materialize.
The Japanese government’s ongoing focus on combating deflation and preparing a supplementary budget also suggests that the likelihood of a December rate hike remains uncertain.
Outlook and Summary
The yen’s recent surge underscores the market’s sensitivity to changes in BOJ policy expectations and safe-haven demand. While Tokyo’s inflation data supports the case for a rate hike, weaker demand and government priorities could lead the BOJ to adopt a cautious approach.
For forex market participants, closely monitoring Japanese economic data and policy signals will be crucial. The yen’s volatility may persist as uncertainty around BOJ actions and global market conditions continues to evolve.
