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Yen slips after Bank of Japan decision; dollar firm ahead of Fed

Tyrone Siu | Reuters

The dollar jumped against the yen on Tuesday, after the Bank of Japan said it intends to keep rates low for an "extended period of time," and the greenback was firm against a basket of peers ahead of the U.S. Federal Reserves two-day monetary policy meeting ending Wednesday.

The dollar was 0.68 percent higher against the yen at 111.81, on pace for its best day in nearly three weeks.

"Clearly the yen is struggling as a result of the Bank of Japan announcement overnight," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

At a two-day rate review that ended on Tuesday, the Bank of Japan kept its interest rate targets steady but for the first time adopted a forward guidance on future policy.

"I think there was some expectation leading up to this meeting that we could see a more meaningful shift in BoJ policy, particularly with respect to their huge asset purchase," said Esiner.

"The BoJ has now effectively been taken off the table as a potential driver of the yen. The market can go back to focusing on more U.S.-centric developments," he said.

The U.S. dollar index, which measures the greenback against a basket of six currencies, was up 0.19 percent at 94.50, as investors await the conclusion of the Federal Reserve's two-day Federal Open Market Committee meeting on Wednesday.

"Although U.S. interest rates are widely expected to be left unchanged in July, investors are more likely to be concerned with any potential tweaks in the language of the policy statement," Lukman Otunuga, research analyst at futures brokerage FXTM in London, said in a note.

The dollar index, which has risen 2.6 percent for the year, was on pace to finish July down 0.2 percent, its first monthly decline since March.

"Buying sentiment towards the dollar could receive a boost if the central bank strikes a hawkish tone," Otunuga said.

On Tuesday, data showed U.S. consumer spending increased solidly in June, while inflation rose moderately. Other data showed employers boosting benefits for workers in the second quarter, but wage growth slowed.

With savings at lofty levels and lower taxes increasing take-home pay for some workers, consumer spending is likely to remain strong this year and allow the Federal Reserve to continue gradually raising interest rates.

The British pound was little changed against the dollar as investors prepared for the Bank of England's monetary policy meeting later this week, for which markets are now pricing in a near-90 percent chance of a 25-basis-point rate rise.

The Chinese yuan rose against the dollar on Tuesday in offshore trading after Bloomberg reported the United States and China aim to resume talks in a bid to avert a trade war between the world's two biggest economies.

Where's the dollar headed?