Yen slides to 11-month low on BOJ easing; dollar gains on data

March 13 (Bloomberg) -- The yen dropped to the weakest level against the dollar in almost 11 months after Bank of Japan Governor Masaaki Shirakawa indicated the central bank will keep using monetary policy as a tool to tackle deflation.

The dollar strengthened as retail sales gained the most in five months, further tempering speculation the Federal Reserve will signal additional stimulus after a meeting today. The pound rallied as U.K. housing prices climbed to a 19-month high. The euro fell against most of its 16 major counterparts as a European Central Bank council member said policy makers are discussing ways to withdraw some of the emergency cash they injected into the banking system.

“Monetary-policy expectations are now driving currencies again, so dollar-yen has performed so well because the combination of the possibility of less-dovish comments from the Fed and more-dovish comments from the Bank of Japan,” said Kathy Lien, director of currency research with online currency trader GFT Forex in New York. “If we continue to see good U.S. data, we could start to see the Fed dial up the optimism.”

The yen fell 0.7 percent to 82.77 per dollar at 11:07 a.m. New York time, after declining to 82.86, the weakest since April 20. Japan’s currency was 0.1 percent lower at 108.33 per euro. The shared European currency declined 0.5 percent to $1.3088.

European Policy

The 17-nation euro touched its weakest level in a month versus the dollar.

“All council members are aware that non-standard measures create risks and have to be unwound,” Jens Weidmann, who heads Germany’s Bundesbank, said at a press conference in Frankfurt today. “We need this discussion and it is taking place. The time frame depends on several things, including how the environment develops.”

Weidmann wrote a letter to ECB President Mario Draghi about the risks the central bank is taking, fueling speculation of a rift.

Sterling gained 0.8 percent to 83.41 pence per euro after the Royal Institution of Chartered Surveyors home-price gauge increased 3 points from January to minus 13, the strongest reading since July 2010. The pound rose 0.3 percent to $1.5690. It fell to as little as $1.5603 yesterday, the weakest level since Jan. 25.

U.S. Data

The Standard & Poor’s 500 Index rose 0.7 percent as retail sales in the U.S. rose 1.1 percent in February, according Commerce Department figures.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners rose 0.3 percent to 80.088.

“The dollar has been responding positively to U.S. data surprises and that suggests that the market isn’t translating positive data surprises from the U.S. into a broader support for risk appetite but is in fact looking at it as a dollar positive event,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “That’s a very significant change which has been taking place.”

Canada’s dollar rose 0.2 percent to 99.03 cents per U.S. dollar. Mexico’s peso advanced 0.3 percent to 12.6215 versus the dollar as accelerating growth in the U.S. will boost exports.

New Zealand’s dollar was the best performer against the dollar, advancing 0.5 percent to 82.23 U.S. cents.

Japan Banks

BOJ Governor Shirakawa and his board members kept the benchmark interest rate between zero and 0.1 percent, the central bank said in a statement today. Policy makers left its asset-purchase fund at 30 trillion yen ($360 billion) after unexpectedly boosting bond buying by 10 trillion yen at the Feb. 14 meeting. The measures contributed to weakening the yen and helped boost stocks, Shirakawa told reporters in Tokyo.

“As soon as the market saw Shirakawa was actually very close to easing, the yen got sold off quite aggressively,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “We’re in risk-on mode today. There’s a definite calming of nerves over the euro zone and that’s really adding to things.”

The dollar may strengthen to 85 yen by the middle of this year as the greenback’s 100-day moving average rose above its 200-day moving average, forming a so-called golden cross, said Koji Fukaya, Credit Suisse’s chief currency strategist in Tokyo.

Implied volatility of three-month options on the dollar-yen currency pair declined to 10.86 percent, according to data compiled by Bloomberg. It advanced to 11.21 percent yesterday, the most since Sept. 29. The implied volatility of three-month euro-dollar options declined to 10.67 percent from 11.34 percent a week ago.

Japan’s currency slid 6.1 percent in the past month, the worst performer among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar appreciated 1 percent, and the euro advanced 0.2 percent.

Bloomberg News

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