By Gertrude Chavez-Dreyfuss and Joice Alves
NEW YORK/LONDON (Reuters) – The dollar fell against most major currencies on Tuesday in choppy trading, weighed down by expectations of a possible policy shift at the Bank of Japan that could end its so-called “yield curve control”, which could be a precursor to adopting a tighter monetary policy.
The expectations have pushed the yen higher against the dollar over the last few weeks. Since Jan. 6, the yen has surged nearly 5% against the greenback.
Sterling, meanwhile, led gains versus the dollar, hitting a five-week high after data showed the pace of pay growth in Britain, closely watched by the Bank of England as it gauges how much higher to raise interest rates, accelerated again.
But the market’s focus remained on the Bank of Japan (BOJ). Speculation is building about a change or end to Japan’s yield curve control (YCC) policy, given that investors have pushed 10-year bond yields above a ceiling set by the BOJ of 0.5% and the amount of bond buying to defend it is becoming staggering.
Under the YCC policy, the BOJ targets some short-term interest rates at -0.1% and the 10-year government bond yield at 0.5% above or below zero, in an effort to sustainably achieve 2% inflation.
The BOJ is expected to make a crucial policy decision on Wednesday after a two-day meeting.
“The BOJ meeting is taking center stage. I think we are going to see a really big move one way or the other and that is helping push the dollar lower across the board,” said Joe Perry, senior market analyst at FOREX.com and City Index in New York.
“If the BOJ decides to just tweak their operations, we could see a rebound in dollar/yen to 134.50 or so. But if the BOJ goes full out and discontinues yield curve control, we could see a drop down in 124.”
In late morning trading, the dollar was flat to slightly lower against the yen at 128.535 yen.
Against the Swiss franc, the dollar dropped 0.5% to $0.9218 francs.
The Australian and New Zealand dollars rose against the greenback, up 0.3% at US$0.6977 and up 0.6% at US$0.6418 respectively.
The pound rose 0.7% against the dollar to $1.2275, after surging to a five-week peak of $1.2299 after data showed UK wages growth picked up more pace in the three months to November, while employment rose by a faster-than-expected 27,000.
EYES ON BOJ
Options trade shows a market braced for sharp moves when the BOJ meeting ends on Wednesday, with overnight implied volatility surging to a six-year high.
“We should not assume that a lifting of yield curve control will be the end of Japan’s monetary policy adjustment. The next step will be to start preparing for the end of negative rates … the BOJ will have to start thinking about QT (quantitative tightening) as well to provide supply to the market,” said George Saravelos, FX strategist at Deutsche Bank.
Elsewhere, the U.S. dollar index
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