Yen rises to a four-month high

Tuesday’s surprise decision by the Bank of Japan to review its yield curve control policy and widen the trading band for the yield on 10-year government bonds caused the yen to rise to a four-month high against the dollar.

The BOJ decided to widen the previously specified 25 basis point band for long-term yields, allowing them to move 50 basis points on either side of its 0% target while maintaining broad policy settings unchanged, with short-term JGB yields pegged at -0.1% and the 10-year yield hovering around zero.

The 10-year JGB yield increased from its previous cap of 0.25% to 0.46%. The 10-year Treasury yield shot up to its highest level this month at 3.711%.

The U.S. dollar index declined, falling 0.55% to 104.05, staying within its trading range of 103.44 to 105.90 this month. The index compares the value of the U.S. dollar against the Japanese yen and five other major currencies, including the euro and the British pound.

Before the BOJ announcement, the index had been trending upward as investors continued to weigh the Federal Reserve’s message of longer-term increases in interest rates.

The euro and pound fell as much as 3.7% to their lowest levels since late September at 140.17 yen and 160.34 yen, respectively, due to the broad yen gains.

Euro-dollar exchange rates were up 0.2% at $1.0629 and 0.11% at $1.2159 for the sterling.

New Zealand’s kiwi dropped 3.8% to 83.79 yen, a two-month low, while the Australian dollar dropped over 3.6% to 88.08 yen, a seven-month low.

At the post-announcement media briefing, Kuroda stressed that the change was not an interest rate hike but intended to enhance the functionality of the bond market. He reiterated that it was premature to talk about ending stimulus.