LONDON, Dec 8 (Reuters) - The yen headed for a fourth weekly gain against the dollar on Friday, after its biggest rally in almost a year the day before, driven by a burst of optimism among traders that Japan’s ultra-low rates policy may be nearing an end.
The broad strength in the yen kept a lid on the dollar, which was also on the defensive ahead of the closely-watched U.S. nonfarm payrolls report due later on Friday.
Bank of Japan (BOJ) Governor Kazuo Ueda said on Thursday the central bank had several options on which interest rates to target once it pulls short-term borrowing costs out of negative territory.
Markets took those comments as the clearest sign yet that the BOJ could soon phase out its ultra-loose monetary policy and catapulted the yen to multi-month highs against a range of other currencies.
Against the dollar, the yen held firm at 144.23, having surged more than 1% earlier on.
The yen gained over 2% on Thursday, its largest daily rise since January, and was likewise set to end the week with a more than 2% jump. But without more impetus from the BOJ, it may not have much more scope for outsized gains, according to Fiona Cincotta, City Index market strategist.
"Without anything for the market to get their teeth into from the BOJ, the sell-off (in the dollar) has been done and, as far as the dollar is concerned, it's almost as if it's waiting for that next catalyst and that next catalyst is going to be today," she said.
A month ago, the yen had hit a one-year lows of 151.92, crushed by the widening gap between U.S. and Japanese borrowing costs. In the past few weeks, the outlook for U.S. interest rates has switched to one of a series of cuts next year, which helped prise the yen off those lows.
YEN ON A TEAR
This week's comments from the top of the BOJ lit a fire under the Japanese currency.
The yen has fared best against higher yielding currencies, such as the pound, which wallowed around four-month lows against the yen, having posted its biggest one-day fall in a year.
Sterling fell to a two-month low against yen on Friday, but was last up 0.2% at 181.04, while the euro headed for a 10th daily loss against the yen - down 0.1% at 155.44 - its longest losing streak since 2017.
The BOJ next meets on Dec. 18 and the options markets shows traders are preparing for volatility around the event, even if the chances of an outright shift in policy are low, according to Ray Attrill, head of FX strategy at National Australia Bank.
"A lot of us have felt that we were going to have some sort of more meaningful policy change this year, and we've been disappointed. So I'm a bit reluctant to jump on the bandwagon and say that (a change) is going to happen on the 19th," he said.
"But obviously, there's no smoke without fire... So I guess the market is understandably taking the view that the December meeting is live now."
Recent weakness in consumption has emerged as a fresh source of concern for BOJ policymakers as they eye an exit from negative interest rates, three sources familiar with its thinking said.
In the broader market, the dollar nudged up, although activity beyond the yen was subdued ahead of the jobs data.
The euro fell 0.2% to $1.07735, while the pound dropped 0.3% to $1.25605, set for a 1% weekly fall.
Elsewhere, the Australian dollar rose 0.17% to $0.6613, while the Chinese yuan weakened against the dollar in offshore trading, down 0.1% at 7.17.
Data on Thursday showed China's exports grew for the first time in six months in November, while imports shrank.
(Additional reporting by Rae Wee in Singapore; Editing by Jamie Freed and Kim Coghill)
