Yen set for best January in seven years as rates path diverge

By Rae Wee

SINGAPORE (Reuters) - The yen was on track for its best monthly start to the year since 2018 on Friday, helped by the view that the Bank of Japan (BOJ) is likely to keep raising rates this year while its global peers elsewhere look to ease policy.

The Mexican peso and Canadian dollar were on guard ahead of a looming Feb. 1 deadline which U.S. President Donald Trump has said would be the date he imposes 25% tariffs on imports from the two countries.

The loonie languished near a five-year low at C$1.4490 and was set for a weekly decline of 1%.

Mexico's peso was recovering from its steep fall from the previous session and last stood at 20.6849 per dollar, though it remained on track for its worst weekly performance since October with a roughly 2% fall.

"If (Trump) wants to talk tough, he's got to act tough as well, and that starts with actually announcing something concrete tomorrow," said Tony Sycamore, a market analyst at IG.

"It's something which I think is coming and more than likely we'll get some more colour on that tomorrow ... It's not good to keep the uncertainty overhanging markets."

In Japan, the yen was last a touch stronger at 154.19 per dollar, having already climbed more than 1% for the week thus far. It was set to gain 1.9% for the month, which would mark its best January performance in seven years.

The yen has drawn support from expectations of further rate hikes from the BOJ this year, with Deputy Governor Ryozo Himino also saying on Thursday that the central bank will continue to raise interest rates if the economy and prices move in line with the bank's forecasts.

"On the back of remarks from Deputy BOJ Governor Himino ... (yen) bulls appear to be more confident about the resolve of policymakers to hike rates in 2025," said Jane Foley, senior FX strategist at Rabobank, who sees dollar/yen trading at 145 by the year-end.

Data on Friday showed core inflation in Tokyo hit 2.5% to mark the fastest annual pace in nearly a year, reinforcing expectations of further rate hikes.

MORE EASING AHEAD

In the broader market, the dollar rose 0.1% to 108.18 against a basket of currencies but was on track for a slight monthly loss of 0.3%.

Data on Thursday showed U.S. economic growth slowed in the fourth quarter, though consumer spending increased at its fastest pace in nearly two years.

"Thursday's GDP report confirmed that the economy, particularly the consumer, remains strong, and that there is no near-term risk of a recession. This gives the Federal Reserve the ability to be patient on rate cuts," said Carol Schleif, chief market strategist at BMO Private Wealth.

The Fed had earlier this week kept rates steady and Chair Jerome Powell said there would be no rush to cut them again, though he also implied there was still scope for easing with rates being "meaningfully" above neutral.

Fed funds futures imply around 45 basis points worth of easing for the rest of this year.

The euro last bought $1.0392 and was headed for a weekly fall of 0.9%, after the European Central Bank (ECB) cut interest rates on Thursday and policymakers guided for a further reduction in March, as concerns over lacklustre economic growth supersede worries about persistent inflation.

Traders also see a similar outcome at next week's Bank of England (BoE) policy meeting, where a 25-basis-point rate cut has been priced in.

Ahead of that, sterling traded 0.05% higher at $1.2423, though was on track to lose 0.7% for the month.

The British pound had faced immense pressure at the start of the month as investors heavily sold British government bonds and the currency in a move that reignited concerns about Britain's finances.

Elsewhere, the Australian dollar was little changed at $0.6209 and was set for a weekly decline of 1.7%, its steepest in over a month.

Australian consumer prices rose at the slowest pace in almost four years in the December quarter, data earlier this week showed, which led to markets ramping up bets for a rate cut from the Reserve Bank of Australia next month.

The New Zealand dollar fell 0.13% to $0.5628 and was similarly on track to lose 1.3% for the week.

(Reporting by Rae Wee; Editing by Stephen Coates)