The Japanese yen fell against the U.S. dollar on Tuesday in volatile trading after the Bank of Japan maintained its ultra-easy policy and signaled an April exit from negative interest rates.
The dollar index rose to a six-week high of 103.76, and was last at 103.58, up 0.24%.
The BOJ kept short- and long-term rate targets unchanged, signaling the bank plans to normalize policy soon.
"The details of the BoJ communication shows they're getting more comfortable with the idea that inflation is on track towards their target," said Vassili Serebriakov, FX strategist, at UBS in New York.
"It did reinforce expectations of policy normalization in April. But it's less clear if it would be a significant event for the yen because it's widely expected," he added.
The yen first weakened after the BOJ decision, with the dollar hitting 148.60 yen. It briefly firmed but by late morning was weaker again with the dollar up 0.2% at 148.36 yen.
The yen is sensitive to the difference in rates between Japan and other markets, and has shed nearly 5% against the dollar this year as markets reduced bets on imminent U.S rate cuts.
BOJ Governor Kazuo Ueda gave no hints on whether the bank would pull short-term Japanese rates out of negative territory at meetings in March or April, as many economists expect. He did say it looked more likely Japan could achieve the bank's 2% inflation target sustainably.
Elsewhere, the U.S. dollar continued to benefit from declining expectations of a rate cut at the Federal Reserve's March meeting.
The U.S. rate futures market was pricing in a roughly 40% chance of a March rate cut, down from as much 80% about two weeks ago, according to LSEG's rate probability app. For 2024, futures traders are betting on five rate cuts of 25 bps each. Two weeks ago they expected six.
"In the context where U.S. data has been resilient and FX volatility has fallen and we'll likely see renewed interest in yen-funded carry trades," Serebriakov said. "That supports buying dollar/yen on the dip."
In carry trades, investors borrow in low-yielding currencies such as the yen or Swiss franc to purchase higher-yielding ones such as the U.S., Australian or New Zealand dollars.
The euro fell to a six-week low of $1.0822, and last traded down 0.3% at $1.08347.
European investors digested a survey of euro zone banks for evidence of the extent to which monetary policy tightening has been passed onto the economy.
The poll showed lenders kept tightening access to credit in the last quarter of 2023 but fewer banks did so than at any point in the previous two years.
Also this week, the European Central Bank meets on Thursday. No change in interest rates is expected but investors will watch what it says about its outlook. Market pricing currently shows a reasonable chance of a rate cut by April.
In other currencies, the pound fell 0.2% against the dollar to $1.2685.
The main British economic news was a smaller-than-expected budget deficit for December, which could open up room for tax cuts in a budget scheduled for March.
China aid
A report that China is weighing a rescue package for its plunging stock markets helped the yuan and the Australian dollar, which is often viewed as a more liquid proxy for exposure to China.
Chinese authorities are considering measures to stabilize the stock market, Bloomberg News reported, citing people familiar with the matter.
The dollar dipped 0.3% against the offshore yuan to 7.174, while the Aussie was flat at US$0.6569.
"The (China) news has triggered risk proxies, including the Australian dollar, New Zealand dollar ... higher," said Christopher Wong, a currency strategist at OCBC.
"It remains to be seen if this is just talk but if it does materialize sooner than later, then risk proxies can trade higher."