FOREX-Yen strengthens after Bank of Japan signals data-driven rate hikes

By Karen Brettell

NEW YORK, Feb 26 (Reuters) - The Japanese yen recovered on Thursday after the head of the Bank of Japan said the decision on whether to increase interest rates at its March and April meetings will be based on economic data, while overall movements in the market were subdued as traders awaited fresh catalysts.

Bank of Japan Governor Kazuo Ueda said the central bank will continue to raise interest rates if Japan makes progress in achieving its economic and price projections.

A report on Tuesday said Japanese Prime Minister Sanae Takaichi expressed reservations about additional interest rate hikes during her meeting with Ueda last week.

The yen JPY= strengthened 0.12% against the greenback to 156.15 per dollar. It had reached a two-week low of 156.82 on Wednesday.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.18% to 97.79, with the euro EUR= down 0.11% at $1.1796.

Moves were muted with traders gauging the outlook for tariffs, risk sentiment and the economy.

"The risk backdrop remains relatively supportive," said Karl Schamotta, chief market strategist at Corpay in Toronto. "But conviction among investors is low, and clear-cut directional trends are nearly absent."

TARIFFS, INTEREST RATES IN FOCUS

The U.S. tariff rate for some countries will rise to 15% or higher from the newly imposed 10%, U.S. Trade Representative Jamieson Greer said on Wednesday, without naming any specific trading partners or giving further details.

The Federal Reserve is expected to keep rates steady until at least June as it balances elevated inflation and labor market risks, which is adding to the lack of market conviction.

Data on Thursday showed that the number of Americans filing new applications for jobless benefits increased marginally last week, and the unemployment rate appeared to hold steady in February amid a stable labor market.

Analysts at TD Securities see continuing risks for further dollar weakness in the coming quarters, noting "strained haven status, and the continued hedge America trade."

"U.S. resilience is likely to fall short of exceptionalism, which in a backdrop of solid global growth, lower rates, and fiscal buffers is positive for risky assets and is bearish for the dollar," the analysts said in a report on Thursday.

European Central Bank President Christine Lagarde said policymakers continued to expect inflation to stabilise at their target rate of 2% in the near term, while repeating her "baseline" expectation that she would stay until the end of her term.

Data released on Thursday showed the ECB sold some of its dollar assets early last year and reduced the weight of the dollar in its foreign exchange reserves.

Sterling GBP= weakened 0.52% to $1.3486. Domestic political risks remained a key driver, with traders focused on a byelection in Manchester, widely viewed as a key test for Prime Minister Keir Starmer and his Labour Party.

The Chinese yuan CNH= strengthened against the dollar in offshore trade, rising 0.22% to 6.842 yuan, the strongest level in almost three years despite the central bank signalling it wanted to curb the currency's rapid gains.

Investors are keeping an eye on rising tensions between the United States and Iran. The countries made significant progress in talks aimed at resolving a longstanding nuclear dispute and averting new U.S. strikes on Iran, mediator Oman said on Thursday, amid a large-scale U.S. military buildup in the Middle East.

In cryptocurrencies, bitcoin BTC= fell 2.01% to $67,554.