The Japanese yen strengthened against the US dollar on Wednesday, nearing a two-and-a-half-month high, as investors anticipated a potential shift in monetary policy by the Bank of Japan (BOJ). The central bank is expected to announce details regarding a reduction in its massive bond-buying programme, with a rate hike also on the horizon.
The yen's rise comes amidst broader market speculation that the BOJ will follow the lead of other global central banks, including the Federal Reserve, in tightening monetary policy to combat inflation.
Meanwhile, the US dollar edged up slightly after the Federal Reserve opted to keep interest rates unchanged during its latest meeting. Despite the hold, the Fed signalled a potential rate reduction as early as its next meeting in September, a move widely anticipated by financial markets.
The Fed's statement acknowledged "further progress" towards their inflation target of 2%, indicating that the central bank remains vigilant in monitoring economic developments. However, the Fed's willingness to consider reducing rates suggests an acknowledgement of the potential economic impact of continued tightening.
The dollar index, which tracks the greenback's performance against a basket of major currencies including the yen and the euro, dipped 0.1% to 104.34. The euro also weakened slightly, falling 0.08% to $1.0806.
Despite the broader dollar weakness, the greenback remained resilient against the Japanese yen, falling 1.02% to 151.2 yen.
As the market awaits the BOJ's policy decision, the yen is likely to remain volatile, with further gains possible if the bank signals a more aggressive approach to monetary tightening.