Dollar edges higher, yen slumps as BOJ maintains dovish stance

The U.S. dollar edged higher in early European trade Tuesday, while the yen slumped after the Bank of Japan maintained its ultra-dovish stance.

At 03:20 ET (07:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 106.122.

Bank of Japan maintains dovish tone
The Bank of Japan was the first of this week’s major central banks to hold its policy-setting meeting earlier Tuesday, and it decided to keep interest rates negative, while only making minimal changes to its yield curve control policy.

The central bank said it will allow some more flexibility in its YCC, potentially letting bond yields move above their 1% cap. But this largely disappointed markets hoping for a more aggressive move by the BOJ.

USD/JPY surged 0.7% to 150.11, crossing the widely-watched 150 level once more, putting potential government intervention into the spotlight once more.

Weak economic data also weighed on the yen, after readings on both industrial production and retail sales disappointed for September.

The BOJ also forecast higher inflation and worsening economic conditions in the coming years, and that it will continue with its pace of quantitative easing in the near-term.

Fed starts two-day meeting
The U.S. dollar index received a boost from the yen weakness, but it has also been underpinned by risks of another rate hike from the Federal Reserve given data points to a still-resilient U.S. economy.

The Fed starts its two-day policy meeting later in the session, to be concluded on Wednesday.

The central bank is widely expected to keep rates on hold, but it is also likely to reiterate its higher-for-longer stance on interest rates – a scenario that bodes well for the dollar.

Euro edges higher ahead of eurozone growth, inflation data
EUR/USD rose 0.1% to 1.0623, ahead of the release of latest eurozone growth and inflation data later in the session, offering clues of future European Central Bank monetary policy decisions.

Gross domestic product is expected to grow by just 0.2% on an annual basis in the third quarter, a drop from 0.5% growth the prior quarter, while consumer prices are seen rising 3.1% annually in October, a drop from 4.3% the previous month.

Data released earlier Tuesday showed that German retail sales fell 0.8% in September, having been expected to rise by 0.5%, as persistently high inflation took its toll on consumption in the euro zone’s largest economy.

Chinese PMIs disappoint
USD/CNY rose 0.1% to 7.3182 after the latest purchasing managers index data showed that China’s manufacturing sector contracted in October, while growth in the non-manufacturing sector slowed substantially.

Elsewhere, GBP/USD fell 0.2% to 1.2148, ahead of the Bank of England’s latest policy meeting later in the week, with the central bank widely expected to keep interest rates on hold.

AUD/USD fell 0.3% to 0.6354, while NZD/USD traded largely flat at 0.5840.