Yen edges closer to intervention zone after BOJ rate decision

By Tom Westbrook and Amanda Cooper

SINGAPORE/LONDON, Dec 19 (Reuters) - The yen fell sharply on Friday as traders drove it towards levels that could trigger official buying after the Bank of Japan raised rates but did not offer much of a hint over future hikes.

The yen fell against the dollar after the BOJ lifted its policy rate to 0.75% from 0.5% in a move that had been well telegraphed by policymakers, prompting traders to sell.

Losses in the Japanese currency extended after BOJ Governor Kazuo Ueda's post-meeting press conference, where he remained vague on the exact timing and pace of future rate hikes.

The dollar rose as much as 1.2% on the day at one point to a high of 157.365 yen, set for its largest one-day rise since early October and its strongest in a month. It was last up 1.1% at 157.22 yen. The euro hit a record high of 183.25 yen and the pound rose by as much as 1.22% to its highest since 2008, at 210.58 yen.

In Friday's statement, the BOJ maintained its view that underlying inflation will converge around its 2% target in the latter half of its three-year projection period through fiscal 2027. It reiterated real rates were at "significantly" low levels even after the hike, and pledged to continue tightening should the economy and inflation pan out as forecast.

But none of this was enough to halt the slide in the yen.

Traders have started to consider the chances of official intervention to support the currency once the yen crossed the 155 level against the dollar in November.

The last time Tokyo authorities stepped into the market to intervene was July 2024, when the dollar/yen rate hit 161.96, the most since the mid-1980s.

With trading likely to be thin in the coming week due to the Christmas holidays, volatility in the yen - something Japanese officials say is more of a concern than outright currency levels - could pick up.

"The danger today, given recent FX price action as rate expectations strengthened, was that there would not be enough in this hike to halt yen selling," Derek Halpenny, head of research, global markets EMEA, at Japanese bank MUFG, said, adding that the yen "needed" higher short-term interest rates to support it and Ueda had not said anything to push them higher.

"Intervention risks over the quieter Christmas period (are) becoming a more realistic prospect," he said.

EURO DIPS AS LAGARDE REBUFFS HAWKS

Overnight, the dollar had briefly weakened following a sharp and unexpected fall in U.S. inflation, but investors were not sure how far to trust the data since collection was interrupted by the U.S. government shutdown, and the move soon retraced.

Sterling round-tripped to sit at $1.3378 after the Bank of England cut interest rates to 3.75%, as expected, but the decision was closer-run than the market had anticipated, which may limit the room for further easing.

The euro held steady at $1.1714 after European Central Bank chief Christine Lagarde on Thursday offered no forward guidance and said all options were on the table, pushing back against more hawkish members.

The ECB left its policy rate on hold at 2%, as expected.

On the political front, European Union leaders decided on Friday to borrow cash to fund Ukraine's defence against Russia for the next two years rather than use frozen Russian assets, sidestepping divisions over an unprecedented plan to finance Kyiv with Russian sovereign cash.

"I’ve never bought the argument that this (freezing Russian assets) would undermine the role of the euro. Investors are smart enough to distinguish between frozen Russian assets, frozen because of a war, and other foreign investors spending their money in Europe," ING global head of macro research Carsten Brzeski said. 

AUSSIE DOLLAR DIPS, CHINA YUAN HOLDS FIRM

Elsewhere, the Australian dollar eased 0.1% to $0.6608, while the New Zealand dollar fell 0.5% to $0.5745.

China's yuan held firm at 7.041 to the dollar in onshore trade, hovering near a more than one-year high hit on Thursday.

(Additional reporting by Tom Westbrook in Singapore; Editing by Jacqueline Wong, Alexander Smith and Louise Heavens)