TOKYO (Reuters) - The dollar was hoisted to a more than five-year high against the yen on Thursday after the Federal Reserve started to dial back its massive bond-buying stimulus, giving markets a strong signal that the U.S. economy was growing at a healthy clip.
The euro also came under pressure against the greenback, hitting a two-week low, and analysts at BNP Paribas continued to recommend short euro/dollar strategy.
The U.S. central bank said it would reduce its monthly asset purchases by $10 billion, bringing them down to $75 billion. The taper will be equally split between mortgage-backed securities and Treasury bonds.
But in a move to forestall any sharp market reaction that could undercut the recovery, the Fed also said it “likely will be appropriate” to keep overnight rates near zero “well past the time” that the U.S. jobless rate falls below 6.5 percent.
The greenback rose to 104.37 yen, a level not seen since October 2008. It jumped 1.6 percent versus the Japanese currency overnight, marking its biggest one-day rally in 4-1/2 months.
“Even though interest rates will remain unchanged for the foreseeable future, the mere possibility that the Fed could reduce asset purchases at every meeting next year until bond buys hit zero is enough reason for investors to buy dollars,” Kathy Lien, managing director of FX strategy for BK Asset Management, wrote in a note.
Barclays said it expected the Fed to reduce its stimulus by $10 billion at each meeting through September 2014, followed by a $15 billion cutback to end the historical campaign at the October policy meeting.
The euro was down 0.1 percent at $1.36690, adding to Wednesday’s 0.6 percent slide and touching its lowest against the dollar since December 6.
“We believe that the outcome bodes well for the USD into early 2014 and should lead market participants to rebuild the USD longs that were unwound after the Fed failed to taper back in September,” analysts at BNP Paribas wrote in a note.
“We maintain a short EUR/USD trade recommendation and suspect that in the context of a positive reaction in equities, USD/JPY is also vulnerable to further upside.”
Sterling pulled back, having rallied 0.8 percent against the dollar on Wednesday after British unemployment fell by more than expected, raising expectation that interest rates could rise earlier than previously forecast.
The pound was down 0.1 percent at $1.6382, off from a more than two-year peak of $1.6486 set on Wednesday.
BK Asset Management’s Lien said strong UK retail sales, due out at 0930 GMT, could drive sterling above its two-year high.
“Given widespread improvements in the UK economy, retail sales are expected to rebound after dropping 0.7 percent the previous month,” she said.
Editing by Shri Navaratnam