The US dollar fell slightly against several major currencies on Tuesday, including the yen, which strengthened following the Bank of Japan's (BOJ) interest rate decision.
Global risk sentiment remained fragile as the Israel-Iran conflict entered its fifth day.
The BOJ did not deliver any major surprises at its two-day monetary policy meeting. It kept interest rates unchanged and announced a new plan to slow the reduction in the size of its balance sheet starting next year, taking into account growing risks such as conflict in the Middle East and US tariffs.
The yen oscillated between losses and gains after the announcement, but turned weaker during Governor Kazuo Ueda's press conference. Meanwhile, the dollar fell about 0.1% against the yen to 144.65 yen.
According to Tohru Sasaki, chief strategist at Fukuoka Financial Group,
“The BOJ still holds a large amount of Japanese government bonds (JGBs) and the decline is not significant. Therefore, the plan to slow down the purchases is partly due to the uncertainty in the bond market and the global economy.”
Japanese Prime Minister Shigeru Ishiba and US President Donald Trump have yet to reach a trade deal.
Tensions in the Middle East continue to weigh on the market. Trump has said he wants a “real solution” to the Iranian nuclear issue and may send senior officials to negotiate with the republic.
On Monday, the White House announced that Trump would leave the G7 Summit in Canada a day early due to the developments in the Middle East. The president has ordered the National Security Council to be on standby in the situation room.
Despite the ongoing Israeli-Iranian conflict, the foreign exchange (FX) market has been relatively unresponsive to the crisis, said Michael Pfister, FX analyst at Commerzbank.
“Many have asked whether this strengthens the US dollar’s status as a safe-haven asset, but compared to currencies like the Canadian dollar and Norwegian krone that are typically hit in these situations, the US dollar has not gained much ground,” he explained.
Pfister added that the US dollar’s move was driven more by oil prices. Regional tensions have pushed Brent crude oil prices higher.
Meanwhile, the euro was marginally stronger at $1.1569. The pound fell 0.1% to $1.3564, despite Trump signing a deal to reduce some tariffs on British imports as the two countries continue to negotiate a full trade deal.
The risk-sensitive Australian dollar rose 0.22% to $0.6539. The US dollar index against a basket of currencies fell 0.1% to 98.124.
The Federal Reserve’s (Fed) policy decision on Wednesday was the focus of FX markets. The Fed is expected to keep interest rates on hold with any indication of the future direction of rates being closely watched by investors.
The market is also awaiting policy decisions from other central banks this week, including the Bank of England and the Swedish Riksbank, to determine the next direction.
