Yen Slides for Third Straight Day as Doubts Grow Over BOJ's Rate-Hike Pace

The yen headed for a third consecutive daily loss against the dollar on Tuesday, as traders questioned whether the Bank of Japan would tighten policy quickly enough to narrow the yield gap with other major economies.

Although the BOJ raised rates last week, the Japanese currency has pulled back from a seven-month high reached earlier in September. Market participants read the dissent of two policymakers, who argued for a more cautious pace, as a sign that further increases could prove difficult to deliver.

"Whether the central bank quickens its pace remains contingent on how events unfold. Questions of where neutral and terminal policy rates sit are still open for debate," said Naomi Fink, chief global strategist at Amova Asset Management.

The yen slipped 0.22% to 157.70 per dollar. Losses were partly contained by a holiday in Japan and the possibility of official intervention.

Multiple forces at play

The currency has also been weighed down by rate increases from the Federal Reserve and other global central banks, with markets pricing in further hikes this year. Those combined pressures have made traders quick to sell the yen even when officials signal support.

"Japan may step in again, but intervention is a warning shot, not a cure. Traders do not believe the tightening cycle will move fast enough to challenge the dollar's yield advantage," said Hassan Fawaz, chairman and founder of brokerage firm GivTrade.

Markets assign roughly a 30% probability to the BOJ lifting its benchmark short-term rate to 1.5% in October, and about a 53% chance that the Fed raises its funds rate window by 25 basis points to 4% to 4.25%.

Euro and sterling ease

Elsewhere, the euro edged 0.1% lower to $1.1453, its weakest since late July, while sterling dipped 0.03% to $1.3365.

"European Central Bank officials have so far maintained a notably hawkish tone, keeping an October hike firmly on the table," ING FX strategist Francesco Pesole wrote. "Even so, investors appear increasingly willing to embrace the opposite narrative, pointing to further near-term downside pressure on the euro/dollar."

Last week, ECB President Christine Lagarde pushed back against investor bets on aggressive rate increases, saying a measured response would be sufficient to contain inflation.

Brent crude futures rose 1.1% to $101.43 on Tuesday, though they have eased from a four-month high touched earlier in September. With Europe heavily reliant on oil imports, swings in crude prices are likely to feed into interest-rate considerations.

The dollar index, which tracks the US currency against six major peers, was 0.09% higher at 100.52.