FOREX-Yen pares losses after BOJ's upbeat views, dollar dogged by rate outlook

(Updates at 0520 GMT)

By Wayne Cole

SYDNEY, Sept 20 (Reuters) - The yen pared its losses on Friday as the Bank of Japan (BOJ) sounded optimistic about growth and signalled it will be judicious about further policy tightening, while the dollar had its own problems as markets priced in more rapid U.S. rate cuts.

It has been a tough week for the yen, with the euro gaining 2.2% to 159.46 as speculators booked profit on recent long yen positions.

The euro also firmed to $1.11635, up 0.9% for the week and within striking distance of the August peak of $1.1201. A break there would target a July 2023 top of $1.1275.

The dollar fell 0.3% to 142.21 yen, well off an overnight high of 143.95, as the BOJ did as widely expected, keeping unchanged its overnight call rate target at 0.25% by a unanimous vote.

It maintained its view the economy remained on track for a moderate recovery, but said inflation was moderating and on target, leaving investors a little less reluctant to sell the yen. It also highlighted currency volatility as a factor in its thinking.

The BOJ's policy statements can sometimes be rather opaque, so investors will be focused on any hints from Governor Kazuo Ueda on the timing and pace of tightening at his post-meeting news conference.

Governor Ueda is expected to be "cautious yet gradually hawkish", Shoki Omori, chief Japan desk strategist at Mizuho Securities, said. "Depending on the degree of this tone, if the hawkish stance is clearly conveyed to the market, dollar-yen exchange rate is expected to trend downward."

Data on consumer prices out on Friday showed core inflation ticked up to 2.8% in August, while overall inflation hit 3.0%.

Samara Hammoud, a currency strategist at CBA, noted Japan's real rate remained deeply negative at about -2.5%, while the BOJ estimated neutral to be in a range of -1% to 0.5%.

"As such, there is scope to further raise the policy rate while keeping financial conditions accommodative," she said. "Our base case remains for the BOJ to next raise rates by 25bp in October, though the risk leans towards a later hike."

"The recent financial market ructions and the upcoming Liberal Democratic Party election may make the BOJ more cautious about raising."

DOLLAR DECLINE

Much of the rest of the world is heading in the other direction, although a much-anticipated rate cut by China's central bank has proved elusive. China unexpectedly left benchmark lending rates unchanged at the monthly fixing on Friday.

China has been hinting at other stimulus measures, enabled in part by the U.S. Federal Reserve's aggressive easing which shoved the dollar to a 16-month low on the yuan.

Major state-owned banks were seen buying dollars in the onshore spot foreign exchange market on Friday to prevent the yuan from appreciating too fast, two people with knowledge of the matter said.

Markets imply a 40% chance the Fed will cut by another 50 basis points (bps) in November and have 73 bps priced in by year-end. Rates are seen at 2.85% by the end of 2025, which is now thought to be the Fed's estimate of neutral.

That dovish outlook has bolstered hopes for continued U.S. economic growth and sparked a major rally in risk assets. Currencies leveraged to global growth and commodity prices also benefited, with the Aussie topping $0.6800.

The U.S. dollar index was stuck at 100.59 and just above a one-year low.

Sterling was another gainer after the Bank of England kept rates unchanged on Thursday, while its governor said it had to be "careful not to cut too fast or by too much". The pound was up 1.2% for the week so far at $1.3290, having hit its highest since March 2022.

(Reporting by Wayne Cole; Additional reporting by Vidya Ranganathan in Singapore and Kevin Buckland in Tokyo Editing by Christopher Cushing, Kim Coghill and Michael Perry)