Dollar and Yen steady as markets anticipate central bank decisions

The Federal Reserve is widely expected to maintain its current stance this week.

The dollar and yen remained within close ranges on Tuesday as traders awaited a series of key central bank decisions, starting with midweek monetary policy meetings from the Bank of Japan (BOJ) and the Federal Reserve.

The Japanese yen paused from its recent rally as the BOJ commenced its two-day meeting on Tuesday, following a surge of over 2 percent against the dollar last week. The yen's strength from the 38-year low of 161.96 against the dollar at the start of the month has been driven by a combination of a global stock market rout and evolving monetary policy expectations.

Bank of Japan Policy Speculation

The BOJ has indicated plans to announce quantitative tightening, with expectations that it will gradually halve its monthly bond purchases over a two-year period. However, uncertainty remains about whether the BOJ will increase rates on Wednesday, which would be Japan's second hike this year. Analysts highlight the BOJ’s history of undershooting hawkish market expectations.

“The real risk from the BOJ is no hike and a weaker yen, given their tendency to undershoot expectations at recent meetings, and hopes of a hike sitting quite high,” said Matt Simpson, senior market analyst at City Index. Markets are currently pricing in a 63 percent chance of a 10 basis points hike.

As of the latest trading, the dollar was 0.12 percent higher, fetching 154.205 yen.

Federal Reserve Outlook

The dollar index, which measures the currency against a basket of peers, was little changed at 104.64. The Federal Reserve is widely expected to maintain its current stance this week, but markets are betting that the U.S. central bank will begin cutting rates at the following meeting in September.

With central bank decisions looming, traders are closely monitoring the outcomes that will shape currency movements in the coming weeks.