Dollar edges lower against yen as markets brace for policy week

The dollar moved modestly softer on Monday as global markets entered a packed week of central bank meetings and crucial U.S. data, with traders largely in a risk control stance ahead of the announcements. The dollar index fell 0.11 percent to 98.30, while the currency weakened 0.39 percent against the Japanese yen to 155.21 per dollar. The euro edged higher to $1.1749, up 0.08 percent, and the dollar ticked a hair firmer versus the Swiss franc rising 0.04 percent to 0.796.

Market participants said the pattern reflected a balance of forces. A widely expected Bank of Japan rate rise of 25 basis points to 0.75 percent would mark further normalization by Tokyo and create upward pressure on the yen. At the same time, markets were pricing a possible 25 basis point Bank of England cut to 3.75 percent, while the European Central Bank along with Sweden’s Riksbank and Norway’s Norges Bank were expected to keep policy rates on hold. The prospect of a BOJ tightening against more neutral or easing moves elsewhere set up a clear policy divergence that was being parsed in currency markets.

Equities and fixed income echoed the defensive tone. MSCI’s global equity gauge slipped on Monday as investors sat on the sidelines, and U.S. stock indices finished modestly lower after an earlier attempt at recovery from a Friday sell off that had been driven by renewed inflation concerns and worries about excess valuation in artificial intelligence related shares. U.S. Treasury yields moved lower alongside equities, reinforcing the sense of caution and reducing the incentive for investors to establish large directional positions.

Cryptocurrencies also reflected the risk off environment with bitcoin dropping 2.78 percent to $86,005.01 on Monday. The move underscored how speculative assets remain sensitive to macro driven swings in risk appetite.

The immediate market implication is heightened sensitivity of exchange rates and cross border flows to the sequence of policy announcements and U.S. data. A BOJ rate increase could strengthen the yen and unwind parts of the dollar funded carry trades that have been in place since global real rates diverged. That would compress dollar returns and could push some Japanese capital back into domestic bonds and equities. Conversely, a BoE cut would likely weigh on sterling and amplify pound dollar volatility. Meanwhile U.S. jobs, retail sales and the latest inflation reading will be monitored for any sign that U.S. policy path should shift from the current higher for longer narrative.

Looking beyond this week, markets are being shaped by the evolving era of policy divergence. Central banks that act differently in the coming months will alter relative yields, trade weighted currencies, and the allocation decisions of global investors. For now market participants prefer to wait and see, keeping positions light until policy moves and headline economic data deliver clearer signals.