(Bloomberg) -- The yen slipped to its weakest level in three weeks versus the dollar as traders remained uncertain on the likely pace for further narrowing of the interest rate gap between Japan and the US.
The Japanese currency depreciated as much as 0.2% to 145.04 against the greenback, a level last seen on Sept. 4, before retracing much of the move in choppy trading. It was little changed at 144.85 at 1:32 p.m. in Tokyo.
Although the Federal Reserve cut interest rates by half a percentage point last week, Chairman Jerome Powell has sown some doubt in the minds of investors about the speed and size of further easing. Meanwhile, Bank of Japan Governor Kazuo Ueda reiterated on Tuesday that the central bank isn’t in a rush to hike rates.
“The risk-on mood, driven by last week’s large FOMC cut and hopes of a soft landing, has overshadowed the narrowing interest rate differentials,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Traders are also preparing for Japan’s ruling party leadership election on Friday for any impact on the yen, as the new leader will most likely become the nation’s next prime minister. The market is focusing on the candidates’ differing monetary policy stances, particularly Sanae Takaichi, a minister for economic security, who said earlier this week that “it’s stupid to raise rates now.”
“Tomorrow’s LDP election is an event risk,” said Kong. “Depending on which candidate wins, market pricing for BOJ rate hikes and the JPY can move sharply in either direction.”
The yen has gained 11% so far this quarter after hitting a 38-year low against the dollar, but the market is now questioning how much the yield gap will narrow from here. Japan also continues to face robust capital outflows, a trade deficit, and negative real interest rates, which are all weighing on the yen.
“The dollar/yen is likely to continue to fluctuate, with market expectations for the size of the interest rate cut at the next FOMC meeting in November changing in response to the strength or weakness of US economic indicators,” wrote Mizuho Securities strategists Masafumi Yamamoto and Masayoshi Mihara in a note.
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