A sliding yen boosted the dollar on Thursday as the Bank of Japan lowered growth forecasts in light of U.S. tariffs and left rates on hold, while investors watched for signs of the trade war cooling and awaited U.S. labour market data.

The yen dropped by as much as 1.1% to 144.74 per dollar, its weakest since April 10. It was last at 144.33 per dollar.

The central bank's hold on interest rates was unanimous and anticipated, but investors saw the downgraded outlook as reducing the likelihood of future hikes.

"It was no surprise that they revised both the growth and inflation down but both were significantly more than the market had expected," said Mohamad Al-Saraf, FX research associate at Danske Bank.

"The signals were clearly more dovish than expectations."

The BOJ now expects underlying consumer inflation to reach levels consistent with its 2% target around the latter half of fiscal 2026 and onward, pushing back the timing by around a year from its previous projection in January.

Money market traders were now pricing in just 10 basis points of tightening by the end of the year, down from around 16 basis points before the meeting.

In a press conference after the meeting, BOJ Governor Kazuo Ueda said there was no need to raise rates in haste when underlying inflation was stalling.

DOLLAR STABILISES

The dollar has so far been one of the bigger casualties of the trade war as President Donald Trump's flip-flopping tariffs have hit growth expectations and rattled confidence, notching its largest monthly fall for 2-1/2 years through April.

But the greenback has come off lows as Trump has suspended much of his tariff barrage and hinted at deals, including with China, which has been hit with the highest U.S. import taxes.

The dollar's rebound extended on Thursday, pushing the euro down to a two-week low of $1.1288 and sterling about 0.2% weaker to $1.3302. Most European markets were closed on Thursday for the May Day holiday.

"We're in a window here where we're on a de-escalation path, and there are some de-escalation trades around it," said Richard Franulovich, Westpac's head of currency strategy in Sydney.

Trump said on Wednesday that he had "potential" trade deals with India, South Korea and Japan and that there was a very good chance of reaching a deal with China.

U.S. Trade Representative Jamieson Greer had said earlier on Wednesday that no official talks were happening with China although Yuyuan Tantian, a social media account affiliated with Chinese state broadcaster CCTV, said Trump's administration had approached China seeking discussions.

A surge in imports to front-run tariffs dragged U.S. GDP into contraction mode in the first quarter, data showed on Wednesday, though some economists took resilient private demand as a positive sign.

Jobless claims and the ISM manufacturing survey are due later on Thursday, although April labour market figures on Friday will be the next piece of hard data markets will use to gauge recession risks.

Expectations are for a slowdown in U.S. hiring to 130,000.

"It will be interesting to see how markets react if we see a notable surprise because U.S. data hasn't played a role for the whole of April," Danske Bank's Al-Saraf said.

"If we look at market reactions, the dollar has not really moved with the U.S. data."

The Australian dollar dipped slightly against its strengthening U.S. counterpart after a bumper April that saw it notch a multi-month peak.

The Aussie was last at $0.6384, having recently found support after a slightly hotter-than-expected inflation reading toned down some of the more dovish bets on the rates trajectory. The New Zealand dollar held its ground at $0.5924.

Source: Reuters