FOREX-Yen eases after weak growth figures, dollar steady as traders weigh rate outlook

By Samuel Indyk and Ankur Banerjee

LONDON, Feb 16 (Reuters) - The Japanese yen was lower on Monday, reversing some of last week's strong gains following soft growth figures, while the U.S. dollar was steady as recent inflation data bolstered bets for interest rate cuts from the Federal Reserve later this year.

Liquidity is likely to be thin through Monday with markets in the U.S., China, Taiwan and South Korea closed for holidays.

The yen JPY= eased 0.4% to 153.28 per U.S. dollar on Monday after climbing nearly 3% last week - its biggest weekly jump in about 15 months - after Prime Minister Sanae Takaichi's Liberal Democratic Party won a landslide election victory.

Data on Monday though laid bare some of the challenges facing Takaichi and her government, with Japan's economy barely growing last quarter, eking out an annualised 0.2% expansion.

"After the election, the political dust may be settling a bit, for the near term at least, and we are seeing the yen increasingly becoming sensitive to data," said Mohamad Al-Saraf, FX and fixed income associate at Danske Bank.

Bank of Japan Governor Kazuo Ueda and Takaichi held their first bilateral meeting since the election on Monday. Ueda said that the two had a "general exchange of views on economic and financial developments." He said the prime minister did not make any specific monetary policy requests.

The BOJ next meets on rates in March, with traders ascribing 20% odds for a hike. Economists polled by Reuters last month expected the central bank to wait until July before tightening policy again.

The BOJ lifted the key rate to a 30-year high of 0.75% in December, although that remains well below most major economies, leading to significant yen underperformance that triggered bouts of direct intervention to support the currency over the past few years.

Goldman strategists said a return to yen weakening and volatility in long-end bonds is likely to follow if the BOJ were to use recent yen strength to stay on a more gradual tightening path. Goldman's 12-month forecast for the yen is 152 per dollar.

FED RATE CUT WAGERS

Meanwhile, data on Friday showed U.S. consumer prices increased less than expected in January, giving the Fed additional leeway for policy easing this year.

"The markets are flirting with pricing in a third cut," said Kyle Rodda, senior financial analyst at Capital.com.

Futures imply 62 basis points of easing over the rest of this year. The next cut is likely in June, with markets assigning 80% odds to a reduction. 0#USDIRPR

The euro EUR= was down less than 0.1% at $1.1863, while sterling GBP= eased slightly to $1.3652.

The U.S. dollar index =USD, which measures the currency against six major peers, was steady at 96.958 after dropping 0.8% last week.

Much of the action after the inflation data was in the bond market. The U.S. two-year Treasury yield US2YT=RR, which reflects Fed policy expectations, closed at its lowest level since 2022 on Friday, while the 10-year yield US10YT-RR fell 4.8 basis points. US/

Meanwhile, the Swiss franc CHF= was a touch softer at 0.7688 per U.S. dollar after gaining more than 1% last week, with investors increasingly wary of intervention from the Swiss National Bank to curb strength in the traditional safe haven.

"Further Swiss franc gains raise the risk of additional downside surprises relative to the SNB's inflation forecasts," said OCBC strategists in a note.

"This could potentially challenge the SNB’s recent tolerance for currency appreciation, even if the bar for returning to negative rates remains high."

The Australian dollar AUD= firmed 0.4% to $0.7096, hanging just below the three-year high it scaled last week, while the New Zealand dollar NZD= was 0.1% stronger at $0.6045 ahead of the Reserve Bank of New Zealand's policy meeting on Wednesday. The central bank is widely expected to hold rates steady.