Yen tanks after BOJ sticks to stimulus, caps volatile week for FX

© Reuters. Japanese yen and U.S. dollar banknotes are seen in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration

LONDON/TOKYO (Reuters) - The Japanese yen fell 2% on Friday after the Bank of Japan bucked a wave of tightening and stuck with its ultra-accommodative stance, adding to soaring volatility in currency markets hit by a series of rate hikes this week.

The Swiss National Bank's surprise decision to raise rates by 0.5% continued to reverberate through markets, with the euro losing half a percent and the franc heading back towards two-month highs hit immediately after Thursday's announcement.

Currency markets, facing the biggest run of monetary policy tightening for decades, are also having to contend with a massive drop in risk sentiment that has sent equity markets tumbling.

The Australian dollar, very sensitive to the broad global investment mood, dropped 0.7% to just under $0.70 as stock markets in Asia tumbled following big falls on Wall Street on Thursday.

The U.S. dollar rose off a one-week low against major peers, following a two-day slide after the Federal Reserve's mid-week rate increase that did not exceed expectations despite being the biggest since 1995.

Against the yen, the greenback climbed more than 2% to 134.92 yen following volatility in the immediate aftermath of the BOJ's decision.

The yen on Wednesday had reached a 24-year low of 135.6 per dollar.

"The BoJ disappointed today by keeping all policy settings unchanged," said Citi analyst Naveen Nair.

The BOJ on Friday vowed to defend its bond yield cap of 0.25% with unlimited buying.

Nair said markets were "seemingly still holding some hope for a BoJ capitulation" with Japanese government bond yields earlier trading above the BOJ's yield cap. The 10-year Japanese bond yield was last at 0.225%, Refinitiv data shows.

The euro lost 0.4% to $1.0515, although it remained above levels reached on Thursday.

The euro was down 0.4% to the Swiss franc at 1.0152 francs per euro. The franc rocketed to a two-month high on Thursday after the rate hike and boosted by a sense among investors that the SNB would not try and stop a strengthening franc as it has in the past.

Giving up earlier gains, the dollar lost 0.1% to 0.9656 francs, after tumbling the most in seven years overnight.

The dollar index, which measures the currency against a basket of six rivals, rose 0.5% to 104.38.

U.S. long-term yields were little changed after dropping sharply following the Fed meeting on Wednesday.

"The surprise rate hike in Switzerland, as well as the European Central Bank's announcement that it is working on a tool to prevent the fragmentation of the European bond markets, will help to limit USD strength around current levels," strategists at UBS's Global Wealth Management’s Chief Investment Office said in a research note.

Sterling slipped 0.5% to $1.2292, giving back some of its 1.43% jump overnight, when the Bank of England decided to lift rates again -- albeit by less than many in the market had expected -- along with a hawkish signal about future policy action.