* Dollar knocked off two-week highs vs currency basket
* Yen at fresh 6-year low vs NZ dlr; 10-month low vs Aussie
* Yellen says Fed's commitment still needed for some time
(Adds fresh comment, details on options)
By Anirban Nag
LONDON, April 1 The yen eased on Tuesday as
Japan's sales tax rose, although the dollar weakened after the
head of the Federal Reserve defended the central bank's loose
policy and highlighted slack in the economy.
The dollar index slipped to 80.059, off a two-week
high on Monday of 80.296. Against the yen, the dollar inched up
to 103.35 yen, close to the three-week high of 103.44 yen
struck a day earlier, although it underperformed the euro, which
posted sizeable gains against the yen.
Japan's Tankan survey was a slight disappointment and raised
doubts about whether activity will continue to improve this
year. It will keep alive expectations the Bank of Japan may ease
policy further if the pain from the sales tax hike proves worse
than expected, analysts said.
"If there is clear weakness in the economic data from Japan
- we could see the BOJ ease policy," said Yujiro Gato, currency
strategist at Nomura. "But we do not expect that policy easing
to take place anytime soon, perhaps in the third quarter."
"So those expecting the BOJ to ease in the short term could
be in for a disappointment. But any dips in dollar/yen should be
bought into, and we eventually expect it to rise to 104 yen."
In a fresh setback for dollar bulls, though, Fed chair Janet
Yellen said on Monday that "considerable" slack still existed in
the U.S. jobs market and that further monetary stimulus could be
Her comments somewhat countered those made last month, when
she suggested the possibility of rate hikes from early 2015.
Still, with the Fed on track to withdraw monetary stimulus,
any further easing by the BoJ is expected to weigh on the yen,
said Jane Foley, senior currency strategist at Rabobank.
"On the assumption that yields on US treasury paper rise in
the aftermath of QE, the continuation of an aggressive
expansionary policy in Japan suggests the yen may again become a
popular funding currency in the coming months," she added.
Indeed, traders said there was plenty of demand for options
betting on gains by the dollar in coming months.
COMMODITY CURRENCIES RISE
Improving risk sentiment, partly on hopes of fresh stimulus
from China, the world's second-largest economy, have also
weighed on the Japanese currency of late. The yen is sought
during times of uncertainty and financial market stress.
In particular, the yen has fallen sharply against
higher-yielding commodity currencies. The New Zealand dollar
reached a fresh six-year high of 89.90 yen on
Tuesday, after rallying 3.6 percent in the first quarter.
The kiwi has been in demand after the Reserve Bank of New
Zealand became the first central bank of a developed country to
start normalising policy this year.
The Australian dollar saw some choppy swings. A slight
improvement in China's official Purchasing Managers' Index
initially helped the Aussie, though a private survey pointed to
a contraction in activity in March.
The Aussie then extended its gains to reach a four-month
high of $0.9310 after the Reserve Bank of Australia
kept interest rates unchanged at 2.5 percent, as expected.
But it quickly gave back those gains after the RBA noted the
currency was still high by historical standards. It last stood
at $0.9240, slightly lower on the day.
The euro climbed to $1.3795, having rebounded from
Monday's low of $1.3721 after data showed easing price pressures
in the euro zone. Most traders do not expect the European
Central Bank to ease policy on Thursday, despite the drop in
inflation last month to 0.5 percent.
As such the euro was up 0.35 percent against the yen at
(Additional reporting by Masayuki Kitano; Editing by Larry