The U.S. dollar briefly dropped to a three-month low in the 135 yen zone Thursday in Tokyo, falling by over 2 yen after U.S. Federal Reserve Chairman Jerome Powell signaled a slowing in the pace of interest rate hikes.

After trading in the lower 138 yen level late Wednesday in New York, the U.S. currency plunged to its lowest level against the yen since August, driven by Powell's remarks earlier in the day that the Fed may start slowing the pace of rate increases as soon as December.

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down," Powell said. "The time for moderating the pace of rate increases may come as soon as the December meeting."

The comments caught some market participants off guard as they had braced for more hawkish remarks from the chief of the central bank, which has maintained a hardline stance on monetary policy to tame inflation.

The Fed has raised its key interest rate by 0.75 percentage point in the past four policy meetings, sending the dollar sharply higher against the yen.

"Before the speech, there was a view that the Fed will continue with a 0.75 point rate hike in December," said Yuzo Sakai, chief manager of foreign exchange business promotion at Ueda Totan Forex Ltd.

"That possibility shrunk after Mr. Powell's speech, as market participants believe a 0.50 point increase is more likely," leading them to unload the dollar, he said.

At 5 p.m., the dollar fetched 136.52-55 yen, sliding from 138.06-16 yen in New York and 138.52-54 yen in Tokyo at 5 p.m. Wednesday.

The euro was quoted at $1.0402-0404 and 142.02-06 yen against $1.0404-0414 and 143.69-79 yen in New York and $1.0352-0353 and 143.40-44 yen in Tokyo late Wednesday afternoon.

The U.S. currency traded between 135.85 yen and 138.11 yen in Tokyo trading Thursday, according to the Bank of Japan.

Tokyo stocks ended higher as the remarks from the U.S. central bank chief helped ease concerns about an economic slowdown stemming from aggressive interest rate hikes.

The 225-issue Nikkei Stock Average ended up 257.09 points, or 0.92 percent, from Wednesday at 28,226.08. The broader Topix index finished 0.89 point, or 0.04 percent, higher at 1,986.46.

Chip-related shares gained ground after the tech-heavy Nasdaq index soared over 4 percent overnight, with Tokyo Electron climbing 1,810 yen, or 4.0 percent, to 46,900 yen.

But gains for stocks were trimmed by selling in some export-related issues, such as automakers, with sentiment dented by a firming yen against the dollar, brokers said.

Canon shed 46 yen, or 1.4 percent, to 3,166 yen, while Toyota Motor slid 12 yen, or 0.6 percent, to 1,998.5 yen.

On the top-tier Prime Market, gainers were led by electric appliance, chemical, and precision instrument issues.

Among Prime Market issues, declining issues outnumbered advancers 1,150 to 620, while 66 ended unchanged.

Trading volume on the Prime Market fell to 1,244.98 million shares from Wednesday's 1,664.50 million.

The yield on the benchmark 10-year Japanese government bond was unchanged from Wednesday's close at 0.250 percent.


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