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FOREX-Fed daring slams dollar, gives Japan a yen headache
September 13, 2012 / 11:22 PM / 5 years ago

FOREX-Fed daring slams dollar, gives Japan a yen headache

* Fed action cements dollar status as a funding currency

* Dollar lower across the board, hits 7-mth low vs yen

* Further yen strength seen spurring intervention talk

By Ian Chua

SYDNEY, Sept 14 (Reuters) - The dollar wallowed at four-month lows against a basket of major currencies in Asia on Friday, having suffered a steep fall after a new stimulus programme from the Federal Reserve cemented its status as a funding currency for carry trades.

The dollar index fell more than half a percent to as far as 79.180, a level not seen since early May. It was last at 79.245. Against the Japanese currency, the greenback skidded to a seven-month trough around 77.13 yen.

Traders said the Fed’s bold action had put Japan in a bind by lifting the yen to levels that threaten already sluggish exports. That fuelled market speculation of intervention by the Japanese authorities, although many expect they will try and talk down the currency first.

“The stakes have been raised for the BoJ to ease further at next week’s meeting now that the Fed has delivered,” analysts at BNP Paribas wrote in a client note.

“Given USDJPY’s sensitivity to U.S. rates, the BoJ will need to adopt a more aggressive easing policy and leave the balance sheet unchanged to weaken the yen.”

Renewed weakness in the dollar saw the euro scale a four-month peak of $1.2986. The single currency has surged nearly 8 percent from a 25-month trough of $1.2042 set in July, helped in part by Europe’s recent moves to tackle its debt crisis.

In fresh efforts to stimulate growth, the Fed said on Thursday it would buy $40 billion of mortgage-backed debt per month until the outlook for jobs improved substantially. It also expects interest rates to stay near zero until at least mid-2015, even if the economy recovers.

“We see the announcement as positive for market risk appetite and negative for the USD,” Barclays Capital analysts said, adding that the dollar’s weakness was likely to be especially persistent against higher-beta currencies.

Indeed, the Australian dollar powered to a one-month high of $1.0563, extending its bounce from $1.0165 plumbed just a week ago. The Aussie is now within easy reach of the August high of $1.0615.

“We expect USD weakness against low-yielders (the euro, yen and British pound) to be less enduring,” they added, noting that the ECB, Bank of England and Bank of Japan were themselves pursuing monetary policy easing.

A key factor allowing the Fed to provide more stimulus is the absence of an inflation threat. At 1230 GMT, the market will get the latest reading on U.S. price pressure. Analysts polled by Reuters expect underlying inflation to remain subdued.

Also in focus is a meeting of euro zone finance ministers on Friday, where discussions will include whether Spain should ask for financial support. Pressure on Madrid to ask for immediate assistance has eased as its borrowing costs have fallen sharply after the recent announcement of the ECB’s new bond-buying programme.

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