FOREX-Yen rises after cautious BOJ action disappoints some

Thu Dec 20, 2012 7:56am EST

Related Topics

* Yen regains ground versus dollar and euro
    * BOJ boosts asset buying by 10 trillion yen
    * Euro rises as tensions over U.S. fiscal cliff ease

    By Anooja Debnath
    LONDON, Dec 20 (Reuters) - The yen rose on Thursday after
the scale of asset purchases by the Bank of Japan disappointed
some investors who had positioned for more aggressive easing.
    Gains in the Japanese currency were expected to be capped
however, by the prospect of further easing by the BoJ next year.
    The Japanese central bank increased its asset buying by 10
trillion yen and said it would debate next month whether there
is room to raise its inflation target, a move that could weaken
the currency.  
    Traders took profits on recent bets against the yen, pushing
the dollar down 0.4 percent to 84.09 yen and away from a
20-month high of 84.62 yen hit on Wednesday.
    The dollar has gained more than 6 percent in the past five
weeks on anticipation that Japan's new government would push the
BOJ to take more aggressive easing steps, and many market
players said there was scope for further yen weakness ahead.
    "The reaction in the market is one of modest disappointment.
Expectations of aggressive BOJ easing have been running ahead of
reality," said Lee Hardman, currency economist at Bank of
Tokyo-Mitsubishi.
    "But there's probably enough in the (BOJ) statement to keep
market expectations for more aggressive easing alive so that
will probably keep any rebound in the yen relatively modest."
    Hardman forecast the dollar to trade at 86 yen in 12 months'
time and the yen's recent weakening trend was sustainable.
    The euro was down 0.1 percent on the day against
the yen at 111.57 yen, paring losses after earlier falling to a
session low of 110.74 yen, and holding below a 16-month high of
112.59 yen hit on Wednesday.

    FISCAL CLIFF
    Against the dollar, the euro rose 0.3 percent on the
day to trade at $1.3265, not far from the 8-1/2 month high of
$1.33085 reached on Wednesday after better-than-expected German
business confidence data.  
    The single currency recouped losses run up earlier in the
session, with some market players saying concerns about U.S.
policymakers not being able to reach a resolution on the "fiscal
cliff" were starting to subside.
    If a deal is not reached the combination of tax hikes and
spending cuts due to kick in early next year could tip the
world's largest economy into recession, and may drag on
currencies linked to the global growth outlook like the euro and
the Australian dollar. 
    "The market is beginning to sense that despite the recent
comments overnight, worries about the U.S. fiscal issue are
probably temporary," said Neil Jones, head of hedge fund FX
sales at Mizuho Corporate Bank in London.
    "Real money buyers are coming back into the markets. There
is a belief a deal will be reached and we will thus see the euro
rally." 
    The Republicans announced plans to put an alternative tax
plan to a vote in the House of Representatives this week,
prompting President Barack Obama to threaten to veto it, thereby
unravelling the progress made over the last week.
 
    Some market players said investors were mostly positioned
for a deal to be reached on time, with some expecting the euro
to go as high as $1.3500 by early January. 
    "At the end of the day, markets are still convinced that a
compromise will be reached on the fiscal cliff and thus risk-on
should still prevail," said one FX trader, adding euro buying
against the dollar and yen would probably continue.
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