FOREX-Yen dips despite rate hike talk; sterling lifted by UK budget

By Ozan Ergenay and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK, Nov 26 (Reuters) - The Japanese yen slid against the dollar on Wednesday even as expectations rose that the Bank of Japan could hike rates next month, while sterling gained as investors welcomed a UK budget that delivered a larger-than-expected fiscal buffer.

The dollar fell, weighed down by expectations of an interest rate cut by the Federal Reserve at next month's meeting and a mixed batch of economic data did not change that view.

But it has been the yen that has been on the market's radar for some time, as investors remain alert for the possibility of Japanese intervention to boost the weakening currency.

The BOJ is preparing markets for a possible interest rate hike as soon as next month, sources told Reuters, reviving previous hawkish language as worries about sharp yen declines return and political pressure to keep rates low fades.

The yen initially rose against the dollar after the report, before reversing course. It was last down 0.3% at 156.51 per dollar, having earlier hit an intraday high of 155.66 JPY=.

"It's going to be hard to significantly change the trajectory of the yen with just one hike unless the BOJ delivers a hawkish hike and commits to raising rates consistently through 2026 to bring inflation under control," said Vassili Serebriakov, FX strategist at UBS in New York.

"Unless that happens, I don't think the yen is going to benefit significantly because the rate differentials between the U.S. and Japan are still quite wide and volatility is still low."

The yen has been under pressure from worries about Japan's worsening fiscal position.

"There is a possibility of intervention over Thanksgiving, but if the market's fear of intervention is sufficient to stop dollar/yen from rising, it sort of reduces the possibility," said Jane Foley, head of FX strategy at Rabobank London.

UK BUDGET BOOSTS STERLING

The pound was also in focus with Britain's budget announcement.

British finance minister Rachel Reeves delivered a budget that will give her more room for meeting her borrowing targets, a move that calmed investor nerves.

In a figure closely-watched by investors assessing Britain's borrowing risks, the Office for Budget Responsibility (OBR) said the government will now have more than double its previous buffer for meeting its fiscal targets even as it raises spending on welfare.

Sterling was last up 0.5% on the dollar at $1.3218 and was also higher versus the euro, which slipped 0.2% to 87.67 pence. GBP=, EURGBP=.

Data showed that initial claims for U.S. state unemployment benefits dropped 6,000 to a seasonally adjusted 216,000 for the week ended November 22, the lowest since April. Economists polled by Reuters had forecast 225,000 claims for the latest week.

A separate report showed non-defense capital goods orders excluding aircraft, a closely-tracked proxy for business spending, jumped 0.9% in September after an upwardly revised 0.9% increase in August.

Investors are also betting that the reported leading candidate to be the next Fed chair may pursue a more dovish policy.

Bloomberg News reported that White House economic adviser Kevin Hassett has emerged as the frontrunner to be the new chair.

Hassett, like Trump, has said interest rates should be lower than they are under current Chair Jerome Powell. U.S. Treasury Secretary Scott Bessent said on Tuesday there is a good chance Trump would announce his pick before Christmas.

"At the end of the day, we have had three months without economic data from the U.S. and we're going to get a lot ... markets will be much more driven by actual fundamental data rather than an appointment for the Fed chair," said Ales Koutny, head of international rates at Vanguard in London.

All of that left traders adding to bets of a Fed cut next month, with markets now pricing in an 85% chance of a 25-basis-point move, according to the CME FedWatch tool.

After rising 0.4% against the dollar on Tuesday, the euro last changed hands at $1.1588 EUR=, up 0.2%.

Elsewhere, the New Zealand dollar NZD= jumped after the country's central bank cut its interest rate to 2.25% as expected, but signaled an end to the easing cycle as the economy showed early signs of recovery.

The Kiwi rose 1.2% to US$0.5690, after earlier hitting its highest in three weeks, as traders reduced expectations for further rate cuts.

The Australian dollar AUD= rose 0.5% to US$0.6502 after Australian inflation accelerated for a fourth straight month in October, closing the door to further policy easing.