The yen fell on Wednesday after the Bank of Japan altered its policy framework and pledged to keep rates lower for longer to generate inflation, while investors bought the dollar ahead of the outcome of the Federal Reserve’s policy meeting.
Japan’s central bank, overhauling its massive stimulus program, decided to scrap its focus on monetary base and set targets for long-term rates. It also committed to an overshoot of its elusive 2 percent inflation target.
The BOJ maintained the 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank. But it abandoned its base money target and instead set a “yield curve control,” under which it will buy long-term government bonds to keep 10-year bond yields around current levels of zero percent.
The BoJ’s measures gave a boost to global risk sentiment and banking stocks and added to downward pressure on the safe-haven yen which tends to do well during times when financial markets comes under stress.[.EU] [MKTS/GLOB]
“The BOJ has come as close to an open-ended commitment to do what it takes to achieve its inflation target. We think this is a valiant attempt but we remain skeptical,” said Mazen Issa, senior currency strategist at TD Securities.
“Dollar/yen staged a mini-rally but stalled near key resistance around the 102.80/103.05 area. We would neutralize longs ahead of the Fed decision.”
The dollar which rose more than 1 percent to a one-week high of 102.79 yen JPY= gave up some of its gains in the European session to trade at 102.05 yen after BOJ Governor Haruhiko Kuroda said the Japanese economy was no longer in deflation.
The euro which had surged to 114.36 yen EURJPY= was trading at 113.75, still up 0.4 percent on the day. Traders said the fact that BOJ was taking action to boost inflation was a surprise to many who had doubts over the central bank had much left in its arsenal.
“The monetary base was abandoned, which could be supportive for the dollar, overall,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.
“Many people expected the BOJ not to take any action at all, and the yen to strengthen, so we now see many people buying the dollar back,” he said.
Investors’ attention will now shift to the Fed. The U.S. central bank is widely expected to hold interest rates unchanged at 0.25 percent to 0.50 percent, and could hint at a rate hike by the end of the year.
Weaker-than-expected U.S. economic data has prompted investors to call off bets for a Fed rate hike on Wednesday.
On Tuesday, data showed U.S. housing starts fell more than expected in August as building activity declined broadly after two straight months of solid increases.
| LONDON
(Addtional reporting by Lisa Twaronite; Editing by Andrew Heavens)
Source: Reuters