The Japanese yen found support on Wednesday amid growing expectations that the Bank of Japan could implement an interest rate increase as early as next month, while the New Zealand dollar experienced significant gains following hawkish signals from its central bank.
BOJ's Hawkish Shift and Yen Dynamics
According to sources familiar with the matter, the Bank of Japan is actively preparing financial markets for a potential interest rate hike that could come as soon as December. This development marks a significant shift in the central bank's approach as concerns about sharp yen declines resurface and political pressure to maintain low interest rates diminishes.
The Japanese currency initially strengthened on these reports before giving back some gains during the trading session. The yen was last trading marginally lower at 156.07 per dollar, after reaching an intraday peak of 155.66 earlier in the day.
Market analysts have highlighted that the upcoming U.S. Thanksgiving holiday on Thursday could create an opportunity for Japanese authorities to intervene in currency markets. Carol Kong, currency strategist at Commonwealth Bank of Australia, noted that "thinner liquidity during the Thanksgiving holiday could provide an opportune moment for Japanese authorities to step in, as this would amplify the impact on markets."
New Zealand Dollar Surges on RBNZ Policy
Across the Asia-Pacific region, the New Zealand dollar jumped substantially after the Reserve Bank of New Zealand delivered a more hawkish than expected policy outlook. While the central bank lowered rates to 2.25% as anticipated, its forward guidance surprised markets by indicating a likely end to the easing cycle.
The RBNZ now projects the cash rate will stand at 2.20% in the first quarter of 2026 and reach 2.65% by the fourth quarter of 2027. This outlook prompted traders to sharply reduce expectations for additional rate cuts, sending the kiwi dollar 1.2% higher to $0.5690.
Jarrod Kerr, chief economist at Kiwibank, explained that "the central bank's balanced risk assessment indicates they're becoming increasingly neutral in their policy stance, essentially signaling that this might be the end of their easing cycle."
The Australian dollar also strengthened, rising 0.57% to $0.6506 after October inflation data exceeded forecasts, effectively closing the door on further policy easing in the near term.
Global Currency Markets React to Fed Expectations
In broader market movements, the U.S. dollar weakened on Wednesday following benign economic data that reinforced expectations of a December rate cut by the Federal Reserve. Recent data showed U.S. retail sales growth falling short of expectations in September, while producer prices aligned with forecasts.
Adding to the dovish sentiment, U.S. consumer confidence declined in November as households expressed concerns about employment prospects and financial stability. These developments have led traders to increase bets on a Fed rate cut next month, with markets now pricing in an 85% probability of a 25-basis-point reduction, according to the CME FedWatch tool.
The potential appointment of Kevin Hassett as the next Fed chair has further weighed on the dollar. Hassett, who has emerged as the frontrunner according to Bloomberg News, has expressed views aligned with President Trump's preference for lower interest rates. Market analysts suggest his appointment would likely reinforce the administration's push for easier monetary policy.
Meanwhile, the euro edged closer to the $1.16 level, trading at $1.1590, supported by signs of progress in peace negotiations between Russia and Ukraine. Sterling advanced 0.2% to $1.3191 ahead of a crucial UK budget announcement by Finance Minister Rachel Reeves.
Against a basket of currencies, the dollar index declined 0.2% to 99.65, reflecting the broader weakness in the U.S. currency as global central bank policies continue to diverge.
