FOREX-Yen weakens as BOJ tweaks monetary policy, euro outperforms

Tue Feb 18, 2014 7:11am EST

* Dollar and euro trade at February highs versus yen

* Euro hits five-week high versus Swedish crown

* Aussie slips from 1-month high as PBOC drains liquidity

By Anirban Nag

LONDON, Feb 18 (Reuters) - The yen fell to its lowest point in nearly three weeks against the dollar and the euro on Tuesday, after the Bank of Japan held policy steady, as expected, and extended a special lending programme to support the economy.

In an attempt to get Japanese banks to lend more, the BOJ decided to extend three special loan facilities by one year. It also raised the maximum amount of the loans and said financial institutions would be able to borrow funds at a fixed rate of 0.1 percent over 4 years instead of 1-3 years at present.

The measures were seen as an inclination to ease monetary policy and sent Japanese stocks higher and the yen lower. BOJ chief Haruhiko Kuroda said the economy was moving in line with the central bank's assessment, suggesting no further easing steps were likely in the near term.

The Nikkei stock average ended 3.1 percent higher, pushing the yen lower. The dollar was up 0.55 percent at 102.50 yen, having hit a February high of 102.745, while the euro was up 0.7 percent at 140.70.

"The extension of the loan schemes both in size and lifespan are seen as particularly beneficial to the financial sector, helping the Nikkei to end up and reverse the recent dollar/yen bear trend," said Tom Levinson, currency strategist at ING. He added that 102.85/95 yen resistance should hold for now.

Still, some market participants used the BOJ's announcement as an excuse to buy back dollars after the U.S. currency's recent decline. The latest easing by the BOJ comes nearly a year after it unleashed a massive bond-buying programme aimed at getting the economy out of years of deflation.

"The accelerated yen sell-off in part reflects reinforced investor expectations that the BoJ may deliver more significant monetary easing later this year," said Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi UFJ.

EURO ADVANCES ACROSS THE BOARD

The highlight of the European session was the euro hitting a five-week high against the Swedish crown of 8.9180 crowns after consumer prices in Sweden fell more than expected in January and revived talk of an interest rate cut.

The euro also rose against the British pound to trade at 82.25 pence after softer-than-expected UK inflation data. The single currency's gains across a host of currencies propped it up against the U.S. dollar, too.

The euro rose to $1.37345, not far from its Jan. 24. high of $1.3740 which for now was also acting as a key resistance. The euro barely reacted to a mixed German ZEW survey.

The Australian dollar slipped from a one-month high of $0.9079 to trade lower on the day at $0.9020. It eased after China's central bank drained funds from the market and signalled a continuation of its tight liquidity policy aimed at managing a slowdown in the world's second-largest economy.

The Aussie is often used as a more liquid proxy to investments in China.

Earlier, in minutes released on Tuesday of the Reserve Bank of Australia's Feb. 4 meeting, when the RBA surprised some by dropping its bias to ease further, the central bank noted that a lower exchange rate would support growth.

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