Yen surges as Bank of Japan disappoints

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The U.S. dollar weakened on Friday after data showed that the U.S. economy grew at a slower pace than expected in the second quarter, further reducing expectations that the Federal Reserve will raise interest rates in September.

The Japanese yen, meanwhile, soared after the Bank of Japan expanded stimulus at its highly anticipated meeting, but disappointed investors who had expected bolder measures to stimulate growth and raise inflation in Japan's ailing economy.

U.S. gross domestic product increased at a 1.2 percent annual rate, the Commerce Department said. Economists polled by Reuters had forecast GDP growth rising at a 2.6 percent rate in the April-June period.

The dollar tells the tale of the Fed

"This isn't bad enough to signal that the U.S. economy is falling apart, but it's another nail in the coffin of a September Fed hike," said Steven Englander, global head of foreign exchange strategy at Citigroup in New York.

The Fed's statement from its policy meeting earlier this week disappointed some investors who had thought the U.S. central bank might signal that a rate increase was likely in September.

Improving economic data in recent weeks had led many economists and investors to bring forward expectations for the next rate increase to December, after previously pricing out the likelihood of a Fed hike this year.

What could drive dollar/yen higher?

The dollar index, which tracks the greenback against a basket of six major rivals, last dropped 1.14 percent to 95.60.

The last jumped 2.66 percent against the dollar to 102.02 yen.

Japan's central bank doubled purchases of exchange-traded funds (ETFs) and said it will conduct a thorough assessment of the effects of negative interest rates and its massive asset-buying program in September, suggesting that a major overhaul of its stimulus program may be forthcoming.

"I think the market's going to be punting this back and forth as to whether this is really a disappointment or whether they are playing for time," Englander said.

"Pushing off of the policy assessment to September helped them a lot," Englander added, noting that the market reaction could have been larger.