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Dollar, Euro Gain on Yen as Traders Discount Possible Japanese Rate Hike

The yen fell broadly for a third straight session today as investors reckoned that an interest rate rise by the Bank of Japan would be unlikely to curb relentless selling of the Japanese currency.

Investors are split on whether the BOJ will raise Japanese borrowing costs by a quarter percentage point to 0.5% at the end of a two-day policy meeting Wednesday. But many said
that even if the central bank were to raise rates, it would likely do little to overturn the popularity of carry trades, in which speculators have been dumping the yen in favor of vastly higher-yielding currencies like the New Zealand dollar.

"We think they'll take this opportunity to raise rates, but that the impact will be pretty limited, with the yen already having gained ahead of the meeting," said Camilla Sutton, currency strategist at Scotia Capital in Toronto. "I suspect in the next few weeks dollar/yen will test the 122 level again."

The dollar fell as low as 118.98 yen last week, its weakest in more than a month against the Japanese currency.

With U.S. markets returning from a three-day weekend and no major U.S. data to provide any direction, the dollar was little moved against most major currencies. It momentarily slipped to a six-week low against the euro after BBC News reported that Washington had contingency plans for air strikes on Iran.

But later in New York trade the dollar recovered, and the euro was trading slightly against the greenback.

In addition to the BOJ decision, investors are also looking ahead to U.S. consumer price data, as well as minutes from the Federal Reserve's January policy meeting on Wednesday.

The dollar came under pressure last week from soft economic data and tamer-than-expected comments from U.S. Federal Reserve chairman Ben Bernanke, which revived talk of the Fed coming round to the idea of cutting rates this year.

"With data expected to continue to trend toward the soft side in the coming weeks we think markets will move gradually in the direction of pricing more easing, to the detriment of the dollar," UBS strategists said in a note to clients.

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