NEW YORK (Reuters) - The dollar rose sharply on Friday, hitting a six-week high versus the yen, after the Bank of Japan took one of its main interest rates into negative territory and U.S. gross domestic product data largely matched economists' expectations.
The BoJ said it would apply a negative interest rate of minus 0.1 percent on selected current account deposits that financial institutions hold with it, effectively charging banks interest for holding excess deposits at the central bank.
The bank said it would cut interest rates further into negative territory if necessary.
The rate cut was the latest example of policy divergence between the United States and other world central banks, said Tony Bedikian, managing director of global markets at Citizens Bank in Boston.
The Federal Reserve raised U.S. interest rates in December and signaled that it intended to tighten credit four times this year, while Japan joined the European Central Bank in cutting rates to below zero.
"That in and of itself is a dollar strengthening story," Bedikian said. "We had an outsized move because it was a little bit of a surprise with Japanese rates pulling into negative territory and capital drove into the U.S. markets and into the dollar."
U.S. GDP grew at a 0.7 percent annual rate in the fourth quarter, after a 2 percent growth in the third, but was near economists' revised predictions for economic growth.
"There's a little bit of support in today's number for the Fed raising rates," said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange in New York. "And if there's support for the Fed raising rates that's obviously dollar positive."
Higher interest rates make currencies more attractive for investors because they provide better returns.
The dollar index .DXY, which tracks the dollar against six major world currencies, rose 1.1 percent to 99.586, its highest since Dec. 3.
The greenback booked gains of more than 1 percent against the euro EUR=, British pound GBP=, and Swiss franc CHF= after the GDP figures were released, moving the dollar into positive territory on the month against each currency.
The dollar rose 2.4 percent against the yen JPY= after the release of the data, reaching its highest since Dec. 18. It last traded up 1.9 percent at 121.05.
Friday's move reversed the greenback's month-long slide against the yen. It rose 0.4 percent against the yen for the month.
The Japanese currency was up more than 1.3 percent in January prior to the BoJ's rate cut announcement Thursday night.
Reporting by Dion Rabouin; Editing by W. Simon and Richard Chang