Key points:

  • The BoJ raised interest rates for the first time in 17 years.
  • The new BoJ discount rate ranges from 0 to 0.1%.
  • The US dollar index is at a two-week high.

The Japanese yen weakened on Tuesday after the Central Bank of Japan (BoJ) made a long-predicted but nevertheless significant decision to abandon its policy of negative interest rates. At the same time, there is an increase in the US dollar in anticipation of the announcement of the decision of the Federal Reserve System (FRS) on interest rates.

Following a two-day meeting on monetary policy, the BoJ ended an eight-year period of negative interest rates, as well as other unconventional tools to stimulate the economy.

Decrease in national currency

As a result, the yen exchange rate against the US dollar fell by 0.8%, exceeding 150 yen per dollar. This is the lowest figure since 1998. Against the euro, the Japanese currency also lost more than 0.7%, hitting a three-week low of 163.425 yen per euro.

The decline comes after the BoJ raised interest rates for the first time in 17 years. The central bank’s new policy rate, the overnight call rate, will range from 0 to 0.1%. BoJ expects that such a measure will maintain “comfortable financial conditions.”

It is worth noting that most traders had already anticipated changes in BoJ’s policy, which softened the market’s reaction to the news.

Overall, the BoJ’s decision to hike rates marked a turning point in Japan’s monetary policy, which could have long-term implications for the yen.

Dollar dynamics

The US Federal Reserve is expected to announce on Wednesday that it will keep interest rates at current levels. However, there is some uncertainty about the signals the Fed may provide regarding its monetary policy path through 2025.

“Whenever the Fed and the Bank of Japan change policy parameters around the same time, it is the Fed that controls and dominates price action, even in the dollar/yen pair,”

– commented Gareth Berry, Macquarie FX and rates strategist.

The U.S. Dollar Index, which measures the U.S. currency against six other key currencies, was at a two-week high, up 0.32% on the day to 103.92.

Strong US economic data released recently indicate that inflation is resilient. This will most likely keep the Fed from cutting rates sharply over the course of the current year, which, in turn, will support the growth of the US currency.

Other currencies

The Reserve Bank of Australia left interest rates unchanged at its meeting on Tuesday, as analysts had predicted. However, the RBA’s cautious outlook on the monetary policy outlook negatively impacted the Australian dollar.

The Australian dollar fell 0.7% to $0.6514, hitting a two-week low. The New Zealand dollar also suffered losses, falling 0.6% to $0.6045.

The euro also declined, losing 0.2% to $1.0847. Sterling fell 0.3% to $1.2686.

In contrast, against the yen, the pound sterling rose 0.5% to 190.74.