FOREX-Yen firms as BOJ board dissent raises prospect of near-term rate hike

By Gregor Stuart Hunter

SINGAPORE, Sept 19 (Reuters) - The yen firmed against the dollar on Friday after the Bank of Japan's decision to hold rates steady came with two dissenting votes calling for a hike, even as it unveiled plans to sell holdings of exchange-traded funds and real estate investment trusts.

The board dissent at the BOJ came as a surprise, unsettling investor sentiment after the Federal Reserve's rate cut this week.

"This was unexpected, and suggests that perhaps policy rate hikes may be coming sooner than anticipated," said David Chao, global market strategist for Asia-Pacific at Invesco in Singapore. The central bank's next meeting on October 30 will now be a live meeting, and "the best chance for a rate hike for the rest of this year," he added.

In a volatile session after the BOJ decision, which saw the board maintain interest rates at 0.5%, the yen surged initially but later pulled back. It was last 0.1% up against the dollar at 147.90 yen JPY=EBS.

"While it’s not unusual for board members to dissent when policy is changed, dissents are less common when policy is being kept unchanged," analysts from Capital Economics wrote in a research report. "Certainly dissents by two board members are very unusual."

The decision comes after data released earlier on Friday showed core consumer prices in Japan rose at their slowest pace in nine months. Market attention is now focused on Governor Kazuo Ueda's press conference for clues on the path of monetary policy, who is speaking against the backdrop of the LDP's leadership election to decide who will replace outgoing Prime Minister Shigeru Ishiba.

Veteran Japanese lawmaker Sanae Takaichi, a fiscal dove who is vying to become the country's first female prime minister and is seen as one of the frontrunners in the race, said she planned to work on a mix of income tax cuts and cash payouts to households.

Across the broader currency market, traders are weighing the long-term economic impact on the dollar, the preeminent global reserve currency, from the Trump administration's barrage of tariffs on imported goods from overseas and a wider shake-up in policymaking.

The U.S. Supreme Court on Thursday set a date of November 5 for arguments it will hear concerning the legality of Trump's global tariffs in a major test of one of the Republican president's boldest assertions of executive power that has been central to his economic and trade agenda.

Trump has also repeatedly criticised the Fed for not cutting rates quickly and more deeply, stoking concerns about the independence of the U.S. central bank.

On Thursday, the Trump administration asked the U.S. Supreme Court to let the president move ahead with firing Federal Reserve Governor Lisa Cook - a move without precedent since the central bank's founding in 1913.

The market is ramping up bets on further easing, with pricing of Fed funds futures implying a 89.8% probability of a 25-bp cut at the central bank's October meeting, up from a 87.4% a day earlier, according to the CME Group's FedWatch tool.

Foreign demand for dollar-denominated fixed income assets remained healthy, with data from the Treasury Department showing overseas holdings of U.S. Treasuries rising to a record in July, surpassing previous highs for a third straight month, led by gains in holdings from Japan and the United Kingdom.

The euro was 0.1% weaker at $1.1773 EUR=EBS, paring gains for the week after hundreds of thousands took part in anti-austerity protests across France on Thursday.

Sterling fell 0.3% to $1.3512 GBP=D3, after Britain's borrowing surged past the official forecasts that underpin the government's tax and spending plans.

A day earlier, the Bank of England kept interest rates on hold and slowed the pace of its programme to run down its government bond stockpile.

The kiwi slipped 0.4% to $0.5861 NZD=D3, extending losses after its biggest one-day decline since April on Thursday in the wake of grim second quarter GDP data.

The offshore yuan traded at 7.1111 yuan per dollar CNH=, little changed on the day, while the Australian dollar fetched $0.6594 AUD=D3, sliding 0.3%.