Stimulus speculation drags down Japanese yen

Economists expect BoJ will loosen monetary policy at this week’s meeting

The yen slipped on Monday on mounting speculation that the Bank of Japan ( BoJ) will ramp up its stimulus program after this week’s policy meeting, while US Federal Reserve prepares for its own gathering.

The meetings are the first since last month’s vote in the UK to leave the EU, which caused central bankers around the world to promise fresh stimulus to negate any possible negative impact.

More than three- quarters of economists polled by Bloomberg News said they expect the BoJ to make a policy move after its two- day meeting ends Friday.

“The tail risk is that if the BoJ remains firm this month, it will cause a knee- jerk risk implosion in the markets, sending stock prices plummeting and catapulting the yen higher,” said Stephen Innes, senior trader at OANDA Asia Pacific.

In Monday afternoon trading, the greenback rose to 106.31 yen from 106.19 yen Friday in New York. The American currency is also well up from levels around 100 yen touched earlier this month in the aftermath of the EU leave vote.

The euro also climbed to 116.65 yen from 116.55 yen in US trade, although it edged down to $ 1.0972 from $ 1.0976.

The US central bank is expected to leave interest rates unchanged following its meeting, which ends Wednesday, but markets are keen for any clues about future policy moves.

In December, the Fed raised rates for the first time in more than nine years, and hinted at more hikes this year.

However, market turmoil at the start of the year, an uncertain global outlook and the Brexit vote have dented the chances of any more moves in 2016, although the possibility is back on the table after a slew of strong US data in recent weeks.

“A balanced assessment will be viewed by traders as leaning hawkish and a strong US dollar reaction is likely, as the market has priced in the probability of a December rate hike,” Innes said.

“A September rate hike is highly unlikely as the US ( presidential) elections occur in November.”

The pound edged up to $ 1.3122 from $ 1.3112 in New York, where it lost nearly 1 percent on data indicating the UK’s manufacturing activity contracted this month at its quickest rate since April 2009 at the height of the global financial crisis.