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FOREX-Dollar plunges vs yen after BoJ, disappointing U.S. GDP
April 26, 2013 / 4:25 PM / in 4 years

FOREX-Dollar plunges vs yen after BoJ, disappointing U.S. GDP

* Dollar/yen resistance at 100 yen still strong

* Bank of Japan holds rates, Japanese inflation weak

* U.S. 1st-quarter GDP growth accelerates but misses expectations

* Focus turns to Federal Reserve and European Central Bank policy

By Julie Haviv

NEW YORK, April 26 (Reuters) - The dollar fell to its lowest against the yen in over a week on Friday after the Bank of Japan left policy unchanged and after data showed U.S. economic growth expanded in the first quarter more slowly than economists had expected.

The dollar was on pace to notch its largest daily loss against the yen since April 15 as a confluence of factors, both technical and fundamental, came into play.

The BoJ held off from announcing new monetary initiatives on Friday, while policymakers were divided over whether the central bank can meet its target for 2 percent inflation in two years.

“Dollar/yen continues to react to what happened overnight and while the BoJ did not surprise, two of the board members said it would be hard to reach the 2 percent inflation target and that put (upward) pressure on the yen,” said Charles St-Arnaud, forex strategist at Nomura Securities in New York.

“Then, we had the weak GDP data, signaling underperformance in the U.S. and that led to short covering,” he said.

U.S. gross domestic product expanded at a 2.5 percent annual rate, the Commerce Department said on Friday, after growth nearly stalled at 0.4 percent in the fourth quarter. The increase, however, missed economists’ expectations for a 3.0 percent pace.

U.S. government bond yields, which move inversely to price, fell after the GDP data as it stoked bets the Federal Reserve might consider more stimulus at its policy meeting next week.

“That drop in yields was also a big driver of the dollar/yen trade today,” St-Arnaud said. “The selling started to feed on itself and everyone started to jump on the selling bandwagon.”

The dollar last traded at 97.92 yen, down 1.4 percent on the day. It hit a session low of 97.54, its lowest since April 17.

Short-covering exacerbated the dollar/yen trade. According to the latest data available, yen net short positions of 93,411 contracts were the third highest in last five years.

The dollar also pulled further away from a four-year high of 99.94 yen touched on April 11.

Aggressive monetary stimulus announced by the BoJ in early April triggered a sharp sell-off in the yen, but traders and analysts said the fact that the dollar had not breached 100 yen left it vulnerable to a pullback.

“The failure at 100 yen has focused people’s minds on whether they may have been too optimistic on the near-term prospects for the yen,” said Jane Foley, Rabobank senior currency strategist in London.

“Today’s inflation data suggested the market may have got ahead of itself in its optimism that monetary stimulus will create enough activity in the economy to push up inflation.”

Data showed the fifth straight month of annual declines in Japanese core consumer prices in March, despite the weaker yen.

Next week ushers in a slew of events and data, including a Federal Reserve policy meeting, a European Central Bank policy meeting and key U.S. employment data.

“Some people were hoping for a strong U.S. GDP number given stagnation in Asia and the euro zone, with the U.S. one of the bright spots,” said Amanda Chow, forex strategist at CitiFX, a division of Citigroup, in New York. “But with the number coming in lower than expected, it was a slight disappointment,”

“We still expect the yen to continue to weaken in the medium term because of economic fundamentals and the fact that the BoJ is determined to do whatever it takes to reach its 2 percent inflation target,” she said. “The GDP data, while weaker than expectations, may not be enough to warrant a reaction from the Fed although that remains to be seen at next week’s FOMC meeting.”

The euro, meanwhile, was expected to stay under pressure in the coming days on expectations the European Central Bank will cut rates next week to support the euro zone’s fragile economy.

The euro last traded at $1.3024, up 0.1 percent on the day, according to Reuters data.

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