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Dollar rallies against yen on potential for expanded BOJ stimulus

Frank van den Bergh | E+ | Getty Images

The U.S. dollar rose to its highest level against the yen in three weeks on Friday after a report said the Bank of Japan is considering expanding its negative rate policy to bank loans and could cut rates further.

The BOJ could consider the new step if policymakers decide to lower the negative 0.1 percent interest rate applied to some bank reserves parked with the central bank, Bloomberg reported.

The dollar rose more than 2 percent against the yen to 111.80 yen, its highest level against the Japanese currency since April 1. For the week, the dollar was set to rise 2.6 percent against the yen, which would mark its strongest weekly gain since late Oct. 2014.

If the BOJ were to apply its negative rate policy to bank loans, it would allow the central bank to cut its deposit rates deeper into negative territory without acting as a headwind for the nation's banks, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"It gives the Bank of Japan more room to cut rates deeper into negative territory, and that's what the yen is reacting to," Esiner said.

The BOJ's next two-day policy review ends on April 28. Esiner said that the dollar could hit 115 yen if greater stability in financial markets puts further pressure on the safe-haven currency.

The euro was last down 0.53 percent against the dollar at $1.1232 after hitting a more than three-week low of $1.1219 in the wake of a worse than expected German purchasing managers' index (PMI) survey. The euro was set for its second straight weekly drop against the dollar.

"The European economy is performing poorer," said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey. "Negative rates are not working."

If euro zone data continues to be weak, it could lead the European Central Bank to ease further, said Kathy Lien, managing director at BK Asset Management in New York. She said that remained a possibility even though on Thursday ECB President Mario Draghi did not suggest an increase in stimulus measures any time soon.

The dollar hit a more than five-week high against the Swiss franc of 0.9796 franc. The U.S. dollar index, which measures the greenback against a basket of six major currencies, was last up 0.54 percent at 95.12 after hitting a more than one-week high of 95.196.