NEW YORK (Reuters) - The yen plunged to a near seven-year low against the U.S. dollar on Friday, putting it on track for its worst day in 18 months, after the Bank of Japan shocked financial markets with an aggressive easing of its monetary policy.
In addition to the BoJ’s decision to expand its already massive monetary stimulus plan, an announcement by the country’s government pension fund that it would increase its holdings of foreign and domestic shares added to yen selling.
Japan is aiming to reverse decades of deflation and subpar growth.
While some easing by Japan’s central bank had been expected, most investors thought any action was months away as Governor Haruhiko Kuroda had voiced optimism over the Japanese economic outlook even after soft economic data.
The dollar rose as much as 3 percent to 112.47 yen JPY=, its highest level since Dec. 31, 2007. In late New York trade it was up 2.77 percent at 112.22 yen, for its best day since April 2013. For the week, the dollar is up 3.77 percent versus the yen.
“If the yen keeps weakening, watch for formal political appeals to stabilize the yen’s value from non-exporting, small and medium-sized enterprises and from power utilities whose nuclear capacity is still offline,” analysts at Eurasia Group wrote clients on Friday.
“If yen depreciation accelerates rapidly and looks to falls below 120/dollar, the Japanese government would likely intervene to put a floor under it,” they said.
Japan’s monetary policies are moving in the opposite direction indicated by the hawkish policy tone adopted this week by the U.S. Federal Reserve. The Fed’s comment on the economy as it ended its bond-buying program raised expectations that the U.S. central bank will increase interest rates sooner than previously forecast.
There are two elements working in favor of a stronger dollar, said Win Thin, currency strategist at Brown Brothers Harriman in New York.
“On one side you have firm U.S. data and the Fed on track to hike next year.” he said. “On the other side you have the BoJ’s aggressive dovish move and the expectations that the ECB is going to have to do more in light of the weak data. That’s driving euro/dollar down.”
The European Central Bank has been more hesitant to throw open the monetary spigots in the face of deteriorating euro zone economic data. And the 0.4 percent rise in consumer prices in October announced on Friday lowered expectations the ECB will ease policy at its meeting next week.
The euro hit a 26-month low against the dollar on Friday, at $1.2484 EUR=, before settling near $1.2533, off 0.62 percent on the day and down 1.07 percent for the week EUR=. The euro rose 2.11 percent against the yen, to 140.61 yen, after earlier hitting a six-week high of 140.70 yen.
The dollar index .DXY, which measures the greenback against six major currencies, reached a four-year high of 87.133 before paring gains to trade at 86.89, up 0.86 percent.
Additional reporting by Anirban Nag in London, and Shinichi Saoshiro and Hideyuki Sano in Tokyo; Editing by Leslie Adler