The Japanese yen fell against the dollar during trading on Tuesday, driven by improved risk appetite and a weak euro, ahead of important central bank meetings this week that could affect expectations for global interest rates.
The yen fell 0.1 percent to 157.66 against the dollar, moving away from its highest level in a month, which it recorded last week, when demand for it increased as a safe haven.
The yen also suffered losses on Monday, while traders awaited the Bank of Japan's monetary policy decision later this week.
The Bank of Japan is expected to keep interest rates unchanged at 1.25 percent at its two-day meeting that ends on Friday, indicating its willingness to continue raising borrowing costs in light of escalating price pressures.
Data released on Tuesday showed that a key indicator of inflation in the services sector in Japan rose 3.7 percent in September compared to the previous year, indicating increasing price pressures, which makes it likely that the central bank will remain on its path towards further raising interest rates.
Moh Seong Sim, a currency expert at OCBC Bank, said the most important point to watch is whether the central bank will feel comfortable announcing that inflation has reached the target rate.
He added: “If they announce this during that meeting... it will serve as a stronger signal that they are proceeding with the path of normalization (of monetary policy),” even if this will happen gradually.
The yen was among the best-performing major currencies last week, when concerns about artificial intelligence in stock markets led to increased demand for it.
Sim noted that although it is too early to consider the possibility of a collapse in the artificial intelligence sector a major feature of the market currently, this matter may become a greater source of concern over the next year. He said that the value of the yen as a hedging tool is likely to increase during that period, a trend supported by reasons including the monetary tightening policy pursued by the Bank of Japan, in addition to the possibility of Japanese investors redistributing their domestic assets.
Four major central banks, along with the Bank of Japan, are scheduled to announce their monetary policy decisions this week. The Bank of Japan meeting will come after the meeting of the Federal Reserve (the US central bank), which expectations indicate that it will not raise interest rates during its two-day meeting that concludes on Wednesday.
The European Central Bank is expected to keep interest rates unchanged at 2.5 percent on Thursday, while the central banks of New Zealand and Canada are expected to raise interest rates during the current week.
On Tuesday, the dollar index stabilized at 102.11 points, near the highest level in two weeks, after the recovery in technology sector stocks on Wall Street led to a renewed appetite for risk, while investors awaited the results of major companies as well as the midterm congressional elections in the United States.
The dollar received support from the decline of the euro, which fell to its lowest levels in about two weeks against the US currency, amid concerns about the financial situation in France, which put pressure on the single European currency. The euro recorded $1.1171 in recent transactions, down by about 1.4 percent this month.
The New Zealand dollar rose 0.4 percent to 0.5702 against the dollar, amid widespread expectations in the markets that the New Zealand Central Bank will raise the official interest rate by a quarter of a percentage point to 3 percent on Wednesday.
Decisive action
In addition, Japanese Finance Minister Satsuki Katayama said on Tuesday that the government is ready to take decisive measures in the currency market.
“We always monitor market movements with a high sense of urgency, including right now,” Katayama added before Parliament, in response to a question about the impact that the government’s fiscal policy might have on the yen and changes in long-term interest rates.
A survey conducted by the European Central Bank, on Tuesday, showed a sharp decline in demand for real estate loans in the euro zone during the three months ending in September, with interest rates rising and conditions for obtaining credit tightening.
The quarterly bank lending survey, conducted by the European Central Bank, showed the tangible impact of tightening monetary policy, which began in June, amid a war-driven jump in inflation in the euro zone, and is expected to continue for the coming months, according to Reuters.
A net 27 percent of the banks surveyed reported a decline in demand for housing loans during the third quarter of the year, a larger decline than expected. The banks were expecting a decline of 12 percent, which also exceeded the decline recorded in the previous quarter, which amounted to 15 percent.
The European Central Bank said in a statement that “high interest rates were the main factor behind the decline in demand, followed by a decline in consumer confidence and deteriorating expectations for the housing market.”
Banks did not tighten conditions for granting real estate loans during the third quarter, but they did so for corporate loans and consumer credit. Banks expect to tighten lending standards for all types of loans during the last three months of the year.
France, which is at the heart of bond market turmoil linked to public financial conditions, was the largest European economy that witnessed a noticeable tightening in lending standards.
The European Central Bank explained that “escalating concerns about risks and a decline in banks’ willingness to bear them remained the main factors behind the tightening of credit standards, while some banks indicated increasing pressures resulting from geopolitical uncertainty and developments in the energy sector.”
Regarding artificial intelligence, most banks reported that they had not yet adopted quantitative criteria for evaluating loans related to it, while a limited number of them indicated that these factors were becoming increasingly important within qualitative assessments of credit applications.
