By Laura Matthews and Amanda Cooper

NEW YORK/LONDON (Reuters) – The yen whipsawed in its most volatile trading session in months on Friday after the Bank of Japan made its yield curve control policy more flexible, which investors took as a step towards an eventual shift in its massive stimulus programme.

After chopping and changing direction as traders digested the BOJ decision, the Japanese yen weakened 0.70% versus the greenback to 140.43 per dollar in early New York trading session.

The BOJ ended its two-day policy meeting on Friday, deciding to keep its short-term interest rate target at -0.1% and that for the 10-year government bond yield around 0%. But at the same time, the central bank said it would offer to buy 10-year Japanese government bonds (JGB) at 1.0% in fixed-rate operations, instead of the previous rate of 0.5%.

“The question is where the Bank of Japan is going? Is this the start of a rate hiking cycle or is this really just a tweak? And there’s no signal,” said Adam Button, chief currency analyst at ForexLive in Toronto.

“This may be the first step towards a credibility crisis for the Bank of Japan and that is really dangerous. They’re on the tightest of tightropes above the pit of alligators. This is the first wobble, and the Bank of Japan cannot afford to lose any of its credibility. I think that’s the big reason why we still see so much volatility.”

Meanwhile, the dollar fell against a basket of its major peers as investors largely shrugged off new data showing inflation slowing as they continue to sort through multiple central bank decisions this week to understand the outlook for monetary policy.

U.S. annual inflation saw its smallest increase in more than two years in June, with underlying price pressures moderating. If the trend continues, it could push the Federal Reserve closer to ending its fastest interest rate hiking cycle since the 1980s.

Inflation as measured by the personal consumption expenditures (PCE) price index increased 0.2% last month after edging up 0.1% in May, the Commerce Department said on Friday. In the 12 months through June, the PCE price index advanced 3.0%. That was the smallest annual gain since March 2021 and followed a 3.8% rise in May.

“The market has largely moved past the inflation story at the moment, and you can see that in today’s data,” said Button.

“There was a time months ago, when even one or two ticks below the consensus was a major market mover, and today is the best evidence yet that the market isn’t overly concerned about inflation.”

The fell 0.138% to 101.530, while the euro eased up 0.46% to $1.1023.

CENTRAL BANK WEEK

Earlier this week, the Fed and the European Central Bank hiked policy rates by 25 basis points, as expected. The ECB raised the possibility of a pause in September as inflation pressures show tentative signs of easing with recession worries mounting, while the Fed on Wednesday, left the door open to more rate hikes, though Fed Chair Jerome Powell gave few hints about the September meeting.

The Fed is having to balance its fight against inflation with an economy that is showing signs of slowing, but is still growing faster than expected and a robust labour market.

Sterling was last trading at $1.2854, up 0.48% .

In cryptocurrencies, bitcoin last rose 1.25% to $29,501.88 while last rose 1.15% to $1,879.60.

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Currency bid prices at 11:11AM (1511 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index

101.5300 101.6900 -0.14% -1.894% +102.0400 +101.3300

Euro/Dollar

$1.1024 $1.0976 +0.45% +2.89% +$1.1047 +$1.0944

Dollar/Yen

140.4250 139.5000 +0.67% +7.11% +141.0700 +138.0500

Euro/Yen

154.81 153.10 +1.12% +10.34% +155.0600 +151.4300

Dollar/Swiss

0.8684 0.8696 -0.12% -6.07% +0.8736 +0.8662

Sterling/Dollar

$1.2855 $1.2795 +0.49% +6.32% +$1.2886 +$1.2767

Dollar/Canadian

1.3234 1.3225 +0.06% -2.33% +1.3248 +1.3200

Aussie/Dollar

$0.6661 $0.6709 -0.71% -2.27% +$0.6713 +$0.6623

Euro/Swiss

0.9572 0.9539 +0.35% -3.26% +0.9577 +0.9526

Euro/Sterling

0.8574 0.8578 -0.05% -3.06% +0.8589 +0.8550

NZ

Dollar/Dollar $0.6160 $0.6182 -0.26% -2.89% +$0.6193 +$0.6121

Dollar/Norway

10.1800 10.2020 -0.25% +3.69% +10.2330 +10.1470

Euro/Norway

11.2234 11.1772 +0.41% +6.95% +11.2325 +11.1556

Dollar/Sweden

10.5228 10.5107 +0.61% +1.11% +10.5885 +10.4769

Euro/Sweden

11.6018 11.5312 +0.61% +4.06% +11.6045 +11.5295