FOREX-Yen surges on BOJ policy shift speculations; dollar slides to seven-month low

The dollar fell to a seven-month low against major peers on Monday while the yen spiked to an over seven-month peak as traders ramped up bets that the Bank of Japan may make further tweaks to its yield control policy at its meeting this week.
The Aussie breached the key $0.7000 level for the first time since August, and last rose 0.54% to $0.7013, after rising as high as $0.7019 earlier in the session.
Similarly, the euro hit a fresh nine-month top of $1.08725, and was last 0.3% higher at $1.0867.
Against a basket of currencies, the U.S. dollar index slumped 0.46% to a seven-month trough at 101.79, as the greenback extended its selloff from last week after data showed that U.S consumer prices fell for the first time in more than 2-1/2 years in December.
With decades-high inflation in the world's largest economy showing signs of cooling, investors are now betting that the Fed may be nearing the end of its rate-hike cycle, and that rates would not go as high as previously feared.
"The confirmation of a deceleration in price pressures is building up hopes that CPI could fall further in coming months," said analysts at OCBC.
"An entrenched disinflation trend can reinforce expectations that the Fed could again scale back on its pace of hike beyond the February FOMC or even position for an earlier pause or dovish pivot."
The Fed's aggressive rate increases have been a huge driver of the greenback's 8% surge last year.
Markets are now pricing in a 91% chance of a 25 basis point increase by the Fed when it announces its policy decision in February, with a 9% chance of a 50 bp increase.
MARKETS CHALLENGE BOJ
The Japanese yen rose to a more than seven-month peak on Monday, as expectations that the BOJ would make further tweaks to, or fully abandon, its yield control policy when it announces its monetary policy decision on Wednesday dominated market sentiment.
The yen jumped more than 0.4% to a high of 127.24 per dollar, and last bought 127.38 per dollar.
Markets have been pressing for the BOJ to shift away from its ultra-easy monetary policy, which caused the yield on Japan's benchmark 10-year government bonds to breach the central bank's new ceiling for two sessions.
"I think the whole world will be focused on Wednesday ... and probably the week in G10 (currencies) will be defined by what happens to the yen and yen crosses, out of that," said Ray Attrill, head of FX strategy at National Australia Bank (NAB).
"I don't think (the BOJ) has the luxury of time to say that they're going to assess and wait until Q2 or Kuroda to see out his term without making any further changes."
Current BOJ Governor Haruhiko Kuroda will step down in April.
The BOJ's yield curve control policy has been a huge factor behind the yen's 12% slump last year, and since the central bank's shock decision last December to widen the band around its yield target, the yen has jumped more than 6%.
Sterling was last 0.45% higher at a one-month peak of $1.2288, while the kiwi similarly jumped 0.6% to $0.64235, after hitting a one-month top of $0.64255 earlier in the session.
U.S. markets are closed on Monday for a holiday, making for thin trading.

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