Yen Steadies as Tokyo Intervention Watch Intensifies After BOJ's Dovish Hike

The yen drew the market's attention on Monday after a steep decline last week that fuelled talk of a rate check by Japanese authorities, while investors weighed the interest-rate paths of major central banks following a string of hikes.

The Japanese currency traded a touch stronger at 156.64 per US dollar, having lost 2% the previous week. Trading was thin because Japanese markets were shut for a three-day holiday, leaving dealers watchful for any official move to support the currency.

The Bank of Japan raised rates on Friday to 1.25%, their highest in 31 years, but the widely anticipated step failed to lift the yen. Two dissenting votes and the absence of explicitly hawkish guidance disappointed investors, and the currency fell sharply before the Nikkei newspaper reported that officials had conducted rate checks. Such checks involve authorities asking banks for currency quotes to gauge market conditions, a step traders often read as a prelude to intervention.

The BOJ's task has been complicated by the Federal Reserve, which along with the European Central Bank raised rates this month and signalled that further tightening may be needed to contain inflation amid the nearly seven-month-old war in the Middle East. HSBC's chief Asia economist, Fred Neumann, said the BOJ's messaging has become harder because the Fed delivered a hawkish signal with a unanimous decision to raise its policy rate. He added that the bar remains high for the BOJ to convince markets of its hawkish tilt, and that investors may again test its resolve in the coming weeks and months.

The yen had climbed to a seven-month high in early September on bets of faster BOJ hikes and early signs of repatriation by Japanese investors, but has since given back some of those gains.

The euro was little changed at $1.1482 after voting projections showed the far-right Alternative for Germany took first place in state elections in northeastern Germany, a setback for Chancellor Friedrich Merz's conservative party. ING economists said the results reflect the low popularity of the federal government and of Merz in particular, warning that years of economic stagnation produced the fragmentation that will now make stagnation harder to escape.

The dollar index, which tracks the US currency against six major peers, held steady at 100.23 after gaining more than 1% last week following the Fed's rate hike and its signal that more increases could come. Traders priced a 55% chance of a hike at the Fed's October meeting, up from 42.5% a week earlier, according to the CME FedWatch tool. Jefferies chief US economist Thomas Simons said midterm elections are unlikely to stop another October hike, that a December move would depend on data and geopolitical developments, and that rate cuts are likely in the second half of 2027.

Sterling last bought $1.339, the Australian dollar stood at $0.7129 and the New Zealand dollar at $0.5721.