Yen, Dollar Fall as Central Bank Outlook Boosts Risk Appetite

Copenhagen - The yen and dollar weakened after the Japanese and U.S. central banks pledged to keep interest rates near zero, boosting demand for stocks and higher-yielding currencies.

The Japanese and U.S. currencies fell most against the South Korean won and South African rand after the Bank of Japan doubled a loan program aimed at countering deflation and the Federal Reserve yesterday retained a pledge to keep its target rate “exceptionally low” for an “extended period.” Canada’s dollar rose to the strongest in almost two years versus the U.S. currency as the price of oil, one of the nation’s biggest exports, had its largest gain in a month.

“We’re clearly setting ourselves up for a risk-on day,” said Elsa Lignos, a currency strategist at RBC Capital Markets in London. “Risk rallies because there was some residual disappointment that the Fed didn’t do more. We’re seeing dollar and yen weakness across the board.”

The yen fell to 124.85 per euro as of 9:10 a.m. in London from 124.31 yesterday in New York. It slid to 90.65 per dollar from 90.31. The dollar was little changed at $1.3776 per euro from $1.3766, after reaching $1.3818, the lowest since Feb. 9.

The MSCI Asia Pacific Index of equities advanced 1.5 percent, the Stoxx Europe 600 index climbed 0.4 percent and futures on the Standard & Poor’s 500 Index gained 0.2 percent. Japan’s stock benchmarks rose to eight-week highs after the Bank of Japan’s announcement. The dollar will fall to $1.39 by the end of the month, Lignos said.

‘Uneventful’ Decisions

The yen pared losses earlier against the dollar as the Bank of Japan’s credit-easing measures fell short of some analysts’ forecasts. Governor Masaaki Shirakawa and his board doubled the three-month loan facility to 20 trillion yen ($222 billion), the bank said in a statement after its meeting in Tokyo. Miyako Suda and Tadao Noda opposed the decision. The bank refrained from calling today’s decision monetary easing.

“The much-anticipated monetary-policy decisions from both the Fed and the BOJ have proved largely uneventful, and are unlikely to derail the recent weakening trend in both the dollar and the yen,” Lee Hardman, a foreign-exchange strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London, wrote in a note today. “Risk assets should continue to outperform.”

The dollar fell against 12 of the 16 most-traded currencies a day after the Federal Open Market Committee left the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent, where it’s been since December 2008.

‘Weaker Bias’

The greenback declined a second day against the euro before a U.S. report today that may show wholesale prices dropped for the first time in five months. Prices paid to U.S. factories, farmers and other producers are projected to fall 0.2 percent in February, according to the median estimate of 70 economists surveyed by Bloomberg News.

“The major central banks look like they will continue to be committed to keeping policy stimulus in place,” said Mitul Kotecha, head of global foreign-exchange strategy for Credit Agricole CIB in Hong Kong. “The dollar is likely to trade with a weaker bias against the major currencies and also emerging- market currencies.”

The dollar will strengthen to $1.30 per euro during the next three months as the Fed moves “very gradually” toward raising interest rates, Gareth Berry, a strategist in Singapore at UBS AG, wrote in a note today.

Fed policy makers upgraded their assessment of current conditions at the end of their policy meeting yesterday, suggesting they are moving closer to boosting the federal funds rate, Berry wrote.

Canadian Dollar, Pound

Canada’s currency reached its strongest level since July 2008 against the greenback after crude oil for April delivery climbed 2.4 percent yesterday, the most since Feb. 16. The currency has risen 3.9 percent this year.

Canada is on course to be the first Group of Seven nation to erase its budget gap after the global financial crisis with its economy expanding at a 5 percent annualized rate in the fourth quarter. The Canadian dollar reached C$1.0132, the highest level since July 2008, before trading at C$1.0143.

New Zealand’s dollar, also a commodity-linked currency, rose 0.1 percent to 71.08 U.S. cents, after climbing to 71.34, the strongest since Feb. 3.

The pound gained for a second day versus the dollar after minutes released today showed Bank of England policy makers unanimously kept their 200 billion-pound ($304 billion) bond- purchase program on hold for a second month on March 4 as some officials argued that inflation risks have increased.

Sterling jumped 0.5 percent to $1.5316 as the nine-member Monetary Policy Committee, led by Governor Mervyn King, voted 9- 0 to maintain the plan because there was “little evidence to suggest” a change in the economic outlook, the minutes showed. The pound was also lifted as a separate report showed U.K. jobless claims unexpectedly fell in February at the fastest pace since 1997.