Yen rises on rate-hike prospect; kiwi jumps after RBNZ decision

By Rae Wee

SINGAPORE (Reuters) -The yen rose on Wednesday following a report the Bank of Japan was preparing markets for a possible interest rate hike as soon as next month, while the New Zealand dollar surged after its central bank signalled a likely end to the easing cycle.

A change in BOJ messaging over the past week has shifted focus back to inflationary risks of a weak yen from earlier worries about the U.S. economy, comments aimed at reminding markets a December rate hike was still a prospect, two sources familiar with the central bank's thinking told Reuters.

The yen reversed losses from earlier in the session on the back of the news, leaving the dollar trading below the 156 yen level. The dollar fell 0.2% to 155.75 yen.

The Japanese currency has come under pressure from mounting worries about the country's worsening fiscal position and a central bank that has been cautious over further rate hikes, with traders on alert to the risk of an intervention from Tokyo to stem the yen's decline.

Some analysts have said the U.S. Thanksgiving holiday on Thursday could open a possible window for authorities to step in.

"The Thanksgiving holiday will mean thinner liquidity, and that could be an opportune time for Japanese authorities to step in, because that will just mean the impact on markets will be bigger," said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

"I think a direct intervention is definitely a risk this week, just based on the comments from Japanese officials."

Elsewhere, the New Zealand dollar jumped after the Reserve Bank of New Zealand lowered rates to 2.25% as expected on Wednesday but provided a more hawkish outlook on the future policy path.

The central bank is now forecasting the cash rate will be at 2.20% in the first quarter of 2026 and 2.65% in the fourth quarter of 2027.

The kiwi last traded 1.2% higher at $0.5688 as traders sharply trimmed expectations for any further rate cuts.

"We were sort of looking for a track that was a little lower. The market had about 2.15% priced in it, and we got 2.20%. It's not a big difference, but it's enough for people to go, well, the downside risk didn't come through," said Jarrod Kerr, chief economist at Kiwibank.

"They're saying that the risks are balanced, and when you say that, you're getting pretty neutral in your commentary, saying, this is kind of it really."

Meanwhile, the Australian dollar similarly traded firmer, up 0.4% at $0.6495, after October inflation came in above forecasts, closing the door to further policy easing.

DOVISH FED PATH ON THE HORIZON

In the broader market, the dollar eased on Wednesday after benign U.S. economic data reinforced expectations of a December rate cut, and as investors wagered that the leading candidate for the next Federal Reserve chair may guide policy in a more dovish direction.

Data on Tuesday showed U.S. retail sales rose less than expected in September while producer prices were in line with expectations.

U.S. consumer confidence also sagged in November as households worried about jobs and their financial situation.

All of that left traders adding to bets of a Fed cut next month, with markets now pricing in an 84% chance of a 25-basis-point move, according to the CME FedWatch tool, which in turn kept pressure on the dollar.

"The overnight data definitely paints a picture of a slowing U.S. economy, and adds to the case for a near-term rate cut by the FOMC," said CBA's Kong.

Against a weaker greenback, the euro edged closer to the $1.16 level and last bought $1.1583, helped slightly by signs of progress in a peace plan between Russia and Ukraine.

Sterling advanced 0.2% to $1.3191, ahead of a high-stakes UK budget announcement by Finance Minister Rachel Reeves later in the day.

Against a basket of currencies, the dollar was down 0.2% to 99.67, having lost 0.3% in the previous session, its biggest daily decline in nearly three weeks.

Also weighing on the greenback was a report from Bloomberg News that White House economic adviser Kevin Hassett has emerged as the frontrunner to be the next Fed chair.

Hassett, like Trump, has said interest rates should be lower than they are now under the leadership of Fed Chair Jerome Powell. U.S. Treasury Secretary Scott Bessent said on Tuesday there was a good chance Trump would announce his pick before Christmas.

"Hassett is viewed as closely aligned with President Trump's preference for lower interest rates, and his appointment would likely reinforce the administration's push for easier policy," said Rodrigo Catril, senior FX strategist at National Australia Bank.

(Reporting by Rae Wee; Editing by Stephen Coates and Jacqueline Wong)