LONDON (AFX) – The yen remained steady against the dollar after the Bank of Japan’s expected decision to raise interest rates for the first time in six years overnight.
Overnight, the Bank of Japan unanimously voted to raise its overnight
lending rate to 0.25 pct from zero. It also raised the official discount rate to
0.4 pct from 0.1.
The central bank sought to calm market expectations for further rate hikes,
however, by saying that it will keep interest rates at "very low" levels for the
time being, implying that it would not rush the second increase.
"In terms of impact on the yen the decision has been very well flagged and
market does not appear to be distressed or confused about the rate outlook,"
said UBS currency analyst Benedikt Germanier.
"The bias recently has been for the yen to weaken, and there is no clear
catalyst of a much stronger yen for now," Germanier added.
The yen reacted little to the news, continuing to trade around the 115.70
per dollar level that was seen prior to the rate announcement.
Meanwhile, markets turned their attention to the massive spike in oil
prices, with Brent crude trading at new record highs of over 78 usd per barrel
as Israel continues its military attack on Lebanon, benefiting the Swiss franc
and the pound as investors flood towards perceived safe haven assets.
Analysts at BNP Paribas said these two currencies tend to rally when higher
risk markets sell-off. They also noted that higher oil prices could also support
sterling from the point of view of interest rate differentials, given the Bank
of England’s concern about rising input prices feeding through into inflation.
Earlier today, the Swiss franc and the pound hit 23 and 18-day highs
respectively against the euro.
The move away from emerging market assets is also benefiting the dollar to
the detriment of the euro, analysts said, as the European currency briefly
touched a 2-week low of 1.2649 usd overnight.
Naeem Wahid at HBOS said a move out of higher risk assets also reduces the
need for reserve diversification, which has tended to favour the euro, while the
return of this capital to the US is positive for the dollar.
Today, attention will focus on US retail sales data this afternoon, which,
together with next week’s inflation data and testimony by Federal Reserve
chairman Ben Bernanke, should help shape market expectations on the US interest
rate outlook.
Among other currencies, the Australian dollar earlier fell to several-day
lows against its US counterpart following disappointing trade data overnight
which showed a massive deficit of 2.27 bln aud in May, well above the 1.30 bln
shortfall expected.
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