Dollar Surges as Risk Aversion Takes Hold, BOJ's Rate Decision Provides Brief Yen Respite

Dollar Firms as Risk-Off Flows Offset Brief Yen Rally Following BOJ Decision

The dollar strengthened on Tuesday as risk-off flows driven by the Iran war offset a brief rally in the yen following the Bank of Japan's most divided policy decision under Governor Kazuo Ueda. The BOJ kept its policy rate unchanged at 0.75%, but a rare 6–3 split - the widest since Ueda took office - fueled expectations of a possible rate hike as early as June.

The yen initially strengthened but reversed course after Ueda's press conference dampened the growth outlook, leaving it little changed at 159.65 per dollar and 186.90 per euro. Three dissenting board members - Junko Nakagawa, Hajime Takata, and Naoki Tamura - voted to raise the policy rate to 1.0%, citing sharply rising inflation risks stemming from war-related energy supply disruptions through the Strait of Hormuz.

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The euro was down 0.11% at $1.17085, while the dollar strengthened 0.51% to 0.79 against the Swiss franc. The U.S. dollar index snapped a two-day losing streak to trade 0.2% higher at 98.66.

Oil prices rose in tandem with the dollar, with Brent crude settling at $111.26 per barrel, a 2.8% increase. The benchmark S&P 500 index was down about 0.5%. U.S. Treasury yields were mostly higher, with the yield on benchmark U.S. 10-year notes up 1.7 basis points to 4.354%.

Spot gold fell 1.84% to $4,596.50 an ounce.

Attention is also turning to the two-day Federal Open Market Committee meeting that ends on Wednesday. Jerome Powell is expected to be succeeded by Kevin Warsh, who is expected to advocate for rate cuts.

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Sterling fell 0.12% to $1.352, while the Canadian dollar weakened 0.42% to C$1.368 per dollar ahead of the Bank of Canada's rate decision on Wednesday. Bitcoin fell 1.08% to $76,145.40, while ether was flat at $2,292.25.

"We maintain a bearish USD outlook into this week's central bank risk events as we look to the Bank of Canada and Federal Reserve rate decisions on Wednesday, followed by the Bank of England and ECB on Thursday," Scotiabank analysts led by Shaun Osborne said in an investor note.