Dollar Dives Vs. Yen: BoJ Governor Signals End In Sight For Negative Interest Rates

The U.S. dollar fell sharply against the Japanese yen on Thursday as foreign exchange traders interpreted comments by Bank of Japan governor Kazuo Ueda to suggest the central bank will soon end its negative interest rate policy.

The U.S. currency fell 2.6% against the yen (USD/JPY) in early trading on Thursday. The yen also gained strongly versus other rivals, climbing 2.4% against the euro and 2.7% on the U.K. pound.

Exchange traded funds that track both long and short positions on the yen were also big movers. ProShares UltraShort Yen (NYSE:YCS) fell 3.7%, while the ProShares Ultra Yen (NYSE:YCL), which tracks bullish interest, surged 3.5% early trading on Thursday.

Meanwhile, the Invesco US Dollar Index Bullish Fund (NYSE:UUP) was down 0.2% in early trading, while the Invesco US Dollar Index Bearish Fund (NYSE:UDN) gained 0.3%.

Policy Tightening Expected From BoJ

The moves were in response to comments from Governor Ueda on the sustainability of Japan’s negative rates policy. Ueda said that monetary policy management would “become even more challenging from the year-end and heading into next year,” suggesting rates could be raised imminently.

Japan’s negative rates policy began in January 2016, setting the short-term interest rate at -0.1% and targeting the yield on the 10-year Japanese Government Bond (JGB) at 0%, with a cap at 1%. The BoJ made its first steps into unwinding the policy in November by removing the cap on the JGB, instead suggesting it now become a reference rate.

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Earlier in the week, BoJ Deputy Governor Ryozo Himino said in a speech that Japan’s aging population of savers would benefit from higher net interest income if rates were to rise.

But the pace of such rises is unlikely to move the needle on yen sentiment a great amount. After four decades of benign inflation, the BoJ is entering new territory and will likely do so very cautiously.

“We see scope for the market to be disappointed over the pace with which the BoJ is willing to withdraw policy accommodation over the next year or so,” said Jane Foley, senior FX strategist at Rabobank.

“That said, we expect the currency pair (USD/JPY) to shift lower in the second half of next year on the back of Fed rate cuts and a very…