Yen drops vs. dollar, euro on predictions of BoJ policy

Wed Jan 9, 2013 4:11pm EST
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By Julie Haviv

NEW YORK (Reuters) - The yen fell against the U.S. dollar on Wednesday, returning to a trend that recently drove the currency to a 2-1/2-year low on expectations of more forceful Bank of Japan policy and the possibility the central bank will raise its inflation goal.

Yen price action should remain volatile as the BoJ January 21-22 policy meeting nears, with the dollar's roughly 1.2 percent pullback in the previous two sessions viewed as an opportunity to buy at lower levels.

The yen, which also tumbled against the euro, was weighed by the prospect of the BoJ raising its inflation target at its next meeting as well as fears of a downgrade on its government debt.

"Looking ahead to the BoJ later this month, investors are a little hesitant to bid the yen up too much higher," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "The outlook for additional easing is keeping a lid on the yen to the upside."

The dollar last traded at 87.78 yen, up 0.9 percent on the day and well above a near one-week low of 86.81 hit earlier in the session. On Friday, the dollar reached a 2-1/2-year high of 88.40.

Sources familiar with the BoJ's thinking said the central bank was likely to adopt a 2 percent inflation target at the meeting, double its current goal, and issue a statement with the government promising bold monetary easing steps.

"A move toward a higher inflation target - Abe is seeking an increase to 2 percent - would require even more aggressive accommodation from the BoJ and would likely provoke additional weakness in the yen," said Eric Theoret, currency strategist at Scotiabank in Toronto.

The BoJ will also consider easing monetary policy again this month, probably through an increase in its 101 trillion yen ($1.2 trillion) asset buying and lending program, the sources said.   Continued...

A picture illustration of coins from various countries laying on 10 Dollar and 100 kuna banknotes, taken in Zagreb January 18, 2011. REUTERS/Nikola Solic