US dollar little changed ahead of BOJ, ECB meetings -January 22, 2024 at 10:46 am EST

* BOJ starts two-day policy meeting

* Bets on BOJ exit from negative rates are off

* ECB seen holding rates on Thursday

* US rate futures further pare back Fed cut in March

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points, updates prices)

NEW YORK/LONDON, Jan 22 (Reuters) – The U.S. dollar was
little changed to slightly lower against a basket of currencies
on Monday ahead of central bank policy decisions in Japan and
the euro zone that may determine the currency’s likely direction
this year.

“Dollar is in a bit of a holding pattern until central banks
kick off tomorrow,” said Helen Given, FX trader at Monex USA in
Washington. “Dollar/yen is down a bit on both positioning for
the BOJ (Bank of Japan) and a slight amount of haven appeal.”

Japan’s yen moved away from Friday’s 148.80 per
U.S. dollar, its weakest in a month, to as firm as 147.61, as
the BOJ started its two-day policy meeting. The dollar was last
down 0.2% against the Japanese currency at 147.83 yen.

Wagers for an exit from negative rates at this meeting have
been wound down following the New Year’s Day earthquake on
Japan’s west coast, alongside dovish BOJ commentary.

The yen, which is sensitive to the difference in interest
rates between the U.S and Japan, has been the worst hit against
the dollar this year, tumbling about 5% in a swift reversal of
December’s bounce to five-month peaks near 140.

“The policy convergence story drove down dollar-yen towards
the end of last year and after New Year, we’ve seen some
reversal of that because the market’s expectations for Fed
(Federal Reserve) rate cuts have been pushed back a little bit
and expectations for a BOJ rate hike have also been pushed
back,” said BofA chief Japan FX and rates strategist Shusuke

Traders said one factor also driving the yen moves was the
expiry of a large amount of currency options this week and the
hedging around those contracts.

LSEG data showed that while most options expiring between
Monday and Thursday with strike prices between 147.15 and 148.10
dollar-yen levels were small, the cumulative amount was around
$2.6 billion.

The European Central Bank is also holding a policy meeting
this week and is expected to leave rates unchanged at 4%, with
ECB officials saying it is too early for rate cuts. With the ECB
likely to remain data-dependent, investors will focus on the
tone of the policy statement and President Christine Lagarde’s
press conference.

The euro was last down 0.1% on the day at $1.0887.
Speculators pared back net long positions on the euro to their
lowest since early November, data from the Commodity Futures
Trading Commission showed last Friday.

The dollar index was modestly lower at 103.23. It has gained
the most among developed market currencies in January, rising
about 1.8% from the start of this year. Its rally, however, has
been up and down as investors try to make up their minds about
when the Federal Reserve will start cutting rates.

Data late last week showing U.S. economic activity remains
resilient despite interest rates at their highest level in
decades caused markets to scale back expectations of rate cuts
beginning as soon as in March.

The U.S. rate futures market on Monday priced in a roughly
40% chance of a rate cut at the March meeting, down from as much
80% 1-1/2 weeks ago, according to LSEG’s rate probability app.
For 2024, futures traders are betting on five rate cuts of 25
bps each, compared with expectations of six two weeks ago.

(Reporting by Gertrude Chavez-Dreyfuss in New York and Alun
John in London; Additional reporting by Vidya Ranganathan in
Singapore and Kevin Buckland in Tokyo; Editing by Sharon
Singleton, Kirsten Donovan)

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