April 22, 2016 / 11:16 AM / 4 years ago

FOREX-Yen sinks on potential for Bank of Japan stimulus expansion

* BOJ mulls negative rates on lending to banks, Bloomberg says

* Yen slips to 2-1/2-week low vs dollar after the report

* ECB policy meeting seen as neutral

By Jemima Kelly

LONDON, April 22 (Reuters) - The yen skidded by more than 1 percent to a 2-1/2-week low against the dollar on Friday after a report said that the Bank of Japan is considering expanding its negative rate policy to bank loans and could cut rates further.

The BOJ could consider the new step if policymakers decide to lower the negative 0.1 percent interest rate applied to some bank reserves parked with the central bank, Bloomberg reported on its website.

The yen has gained about 10 percent against the dollar since the BOJ announced that it was adding negative interest rates to its stimulus programme at the end of January, a step that would usually be expected to weaken a currency.

However, a combination of factors have pushed the yen higher: risk-averse markets stoking demand for safe havens, rising real interest rates in Japan and a fall in the dollar because of a push-back of U.S. rate expectations.

On Friday, though, the yen weakened by as much as 1.2 percent to 110.76 per dollar, heading towards its worst week in 12.

The BOJ’s next two-day policy review ends on April 28.

“If they (the BOJ) were to have some sort of a subsidy policy for the banks, that would allow greater room for policy rates to go lower,” said Alvin Tan, a Societe Generale currency strategist in London.

In the BOJ’s separate semi-annual report assessing Japan’s financial system, the central bank said its negative interest rate policy will weigh on financial institutions’ profits for the time being, though they have the strength to continue taking on risk.

The yen also fell more than 1 percent against the euro to a low of 124.93 yen before recovering a little to 124.625 yen, down 0.8 percent on the day.

The euro fell 0.3 percent against the dollar to a one-week low of $1.12555, with traders citing a worse than expected German purchasing managers’ index (PMI) survey.

The European single currency had reached as high as $1.1399 during a European Central Bank news conference on Thursday but then weakened again to more or less where it was before.

The ECB held policy steady, as expected, with President Mario Draghi saying that the central bank’s policy of adding money to the system and keeping down borrowing costs is working, adding that interest rates would remain at record lows for a long time.

“The market went into the meeting wanting to push the euro higher ... and the reality was he didn’t really say anything to justify any move in the euro,” Lee Hardman, a Bank of Tokyo-Mitsubishi UFJ currency economist in London. “In our view, the meeting was basically neutral.” (Editing by David Goodman)

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