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FOREX-Yen edges up as traders doubt BOJ's firepower

(updates, adds details, fresh quote)

* Major currencies little changed ahead of big events

* Investors doubt BOJ can drive yen lower

* BOJ's next step seen as cutting rates and steepening yield curve

By Jemima Kelly

LONDON, Sept 20 The yen edged up against the dollar on Tuesday as traders doubted that the Bank of Japan will be able to meaningfully weaken the yen when it meets on Wednesday, and betted that the U.S. Federal Reserve will not raise interest rates.

The yen rose 0.1 percent against the dollar to trade at 101.82 yen, having risen almost 20 percent over the past 12 months despite the BOJ's best efforts to weaken it.

The dollar was flat against a basket of major currencies at 95.95.

Esther Reichelt, a currency strategist at Commerzbank Frankfurt said she expected a quiet day, though thin trading volumes could lead to some exaggerated moves not driven by fundamental factors.

"Everybody is just waiting for the BOJ and the Fed - why do anything today?" she said. "Everyone has already positioned for these events and there is no new information that could give them a reason to reposition, so I expect a rather calm day."

BOJ officials have suggested in recent weeks that there is room to cut interest rates further, having taken them into negative territory for the first time earlier this year despite criticism that they are hurting financial institutions and even damaging economic sentiment.

The central bank has acknowledged the potential costs of unorthodox policy, prompting speculation that it will probably seek to steepen the yield curve to mitigate the impact of negative rates on financial institutions.

Yet currency market players are not so sure such a step would help to reverse the yen's rally, amid a growing sense that the BOJ may be running out of ammunition.

"We doubt that just tweaking current policy steps in an attempt to steepen the yield will prove effective at re-weakening the yen on a sustainable basis," said Lee Hardman, currency analyst at Bank of Tokyo Mistubishi. "The yen could even strengthen if the BoJ refrains from easing tomorrow."

Dealers said that selling dollar/yen after the BOJ's policy meetings has been a winning strategy this year - the yen gained sharply following the BOJ's last three meetings.

Dollar/yen options pricing suggests the market thinks the risk of the dollar falling below 100 yen is relatively small.

The overwhelming consensus ahead of the result of the Fed's meeting, which will follow the BOJ's, is that it will hold rates steady this week - only a 12 percent chance of a hike is priced in, according to CME FedWatch.

But some market players expect the Fed to drop a clear hint that it will raise interest rates this year. That should support the dollar broadly at a time when most other central banks in the world remain in an easing cycle.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Anirban Nag; Editing by Hugh Lawson and Raissa Kasolowsky)

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