Yen Volatility Sparks Rate Check Speculation Amid Global Central Bank Hikes

Currency markets are focusing on the yen after its sharp drop last week sparked speculation of a rate check from Tokyo. The Bank of Japan raised rates to their highest level in 31 years, but two dissenting votes and lack of explicitly hawkish guidance disappointed investors.

The BOJ's messaging has become harder due to the Federal Reserve's unanimous decision to raise its policy rate, says Fred Neumann, chief Asia economist at HSBC. The yen had firmed to its strongest level in seven months in early September as traders wagered on a faster pace of BOJ hikes and signs of repatriation by Japanese investors.

Traders are now pricing in a 55% chance of a rate hike at the Fed's next meeting in October, up from 42.5% a week earlier. The dollar index is steady at 100.23 after gaining more than 1% last week following the Fed's rate hike.

The euro is little changed at $1.1482 after voting projections showed the far-right Alternative for Germany took first place in state elections in northeastern Germany. The results echo the low popularity of the federal government and Chancellor Friedrich Merz, according to ING economists.