Dollar Falls After Bank Of Japan, Fed Updates

Pain for the U.S. dollar intensified Thursday, with the currency extending already sharp losses against the Japanese yen after the Bank of Japan raised its assessment of the economy but cut its growth and inflation outlooks.

The dollar had already been shoved below the ¥100 level on Wednesday after an assurance of low U.S. interest rates by Federal Reserve Chairman Ben Bernanke. The dollar late Wednesday bought ¥99.47.

“Complete meltdown in USD. 98 [yen] is support in USD/JPY,” wrote BK Asset Management managing director of FX strategy Kathy Lien on her Twitter feed before the release of the Bank of Japan’s policy decision.

But following the Bank of Japan statement, the dollar  fell to ¥98.60, down from ¥99.09 ahead of the announcement. The central bank left monetary policy unchanged and said the Japanese economy “was starting to recover moderately.” In June, it had said the economy was “picking up.”

However, the Bank of Japan’s median forecast for core inflation in the fiscal year ending in March 2014 eased to a 0.6% rise in prices from a 0.7% rise expected in its previous projections issued in April.

The ICE dollar index , which measures the U.S. unit against six other major currencies, stumbled Thursday to 82.693, down sharply from 84.027 late Wednesday in North American trade.

The euro  jumped past the $1.31 level after the Bank of Japan meeting to fetch $1.3110 compared with $1.2964 late Wednesday. The British pound  climbed to $1.511 from $1.4919.

The dollar had dropped significantly Wednesday after Bernanke indicated at an appearance in Boston that the U.S. central bank wouldn’t rush to raise interest rates, even after the unemployment rate reaches the Fed’s target of 6.5%. A weekly snapshot of jobless claims was due out later Thursday, with economists expecting a slight increase.

But the currency had already weakened before Bernanke’s remarks, with the fall coming after minutes from the Fed’s meeting in June showed that half of the policy-setting board’s members backed paring bond purchases by the end of this year. On the other hand, “many” other members said it’s likely asset purchases would be needed into 2014.

Quantitative easing by central banks tends to weigh on the related country’s currency. The Fed currently buys $85 billion a month in government and mortgage bonds in an effort to keep interest rates low and stimulate economic growth.

Earlier this week, the euro hit a three-month low against the greenback, with pressure coming “mainly on the back of diverging [European Central Bank]-Fed monetary policy expectations,” Crédit Agricole currency strategist Manuel Oliveri told clients.

“It will now be about conditions in the U.S. to drive the [currency] pair,” he said, adding that June retail sales and consumer prices due next week are key data to watch.

“Although we keep an overall bearish [euro] stance, caution may be warranted in the short term as, in our view, the risk for the [euro] to correct higher now appears high,” he said.

U.S. stocks on Wednesday finished little changed as equity investors processed the Fed minutes and Bernanke’s comments.

Aussie joins rally; Brazil up key rate

The embattled Australian dollar  also joined in the rally against the dollar, buying 92.77 U.S. cents compared with 91.70 cents on Wednesday.

The Aussie on Thursday had traded around 92.15 cents before Australian June jobs data showed the number of people employed rose 10,3000 compared with expectations for a flat figure. However, the unemployment rate rose to 5.7%, higher than anticipated.

Meanwhile, the dollar seesawed against Brazil’s currency after the Brazilian central bank raised the country’s benchmark interest rate to 8.5% from 8%. The decision met widely held expectations that the key rate, known as the Selic, would rise in an effort to clamp down on accelerating inflation that has hurt growth in Latin America’s largest economy.

The greenback   bought 2.2711 Brazilian reals, up from 2.2627 reals ahead of the rate decision, but still less than 2.2783 reals late Wednesday.

Source : Marketwatch