(Bloomberg) -- The yen weakened beyond 155 per dollar for the first time in a week as the Bank of Japan kicked off a two-day policy meeting.
The Asian nation’s currency fell as much as 0.8% to 155.22 as traders weigh the risk of the BOJ adding a rate hike to an expected reduction in bond purchases. Yields on most benchmark Japanese government bonds fell Tuesday, with those on 10-year notes declining 3 basis points to 0.995%.
Overnight-indexed swaps priced in a 34% chance of an interest-rate increase of 15 basis points, down from 49% on last Wednesday.
The currency has enjoyed a strong rebound this month, a move that started with suspected Japanese intervention and was amplified by hedge funds cutting short positions. The interconnectedness of the yen to a host of leveraged investments via carry trades meant the sharp swings rippled through global markets.
“Expectations of a BOJ rate hike are receding,” said Takuya Kanda, head of research at Gaitame.com Research Institute in Tokyo. “It would not be surprising if there were further yen selling by foreign investors in the overseas market.”
The drop in the yen brought into a sharp focus currency options worth $3.4 billion that are expiring later Tuesday. The spot exchange rate close to the strike rate of 155 means the amount investors need to hedge can change rapidly.
The yen’s decline pared slightly to 154.90 at 8:37 a.m. London time.
The 10-year yield differential between Japan and the US has shrunk almost 70 basis points from a recent peak reached in late April. Still, the gap remains more than 300 basis points, suggesting a BOJ rate hike or two is unlikely to make a dent on the appeal of selling the yen against higher-yielding currencies.
The wide interest-rate spread between the US and Japan should continue to buoy the dollar-yen exchange rate as long as global macro volatility remains restrained, Alvin Tan, head of Asia foreign-exchange strategy at Royal Bank of Canada in Singapore, wrote in a research note. He sees the yen weakening to 164 by early next year.
--With assistance from David Finnerty.
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