Dollar falls sharply vs. yen
Speculation Japan will act to tighten monetary policy
marketwatch.com
By Leslie Wines, MarketWatch
Last Update: 10:29 AM ET Feb. 7, 2006
NEW YORK (MarketWatch) -- The dollar faced heavy selling pressure against the yen Tuesday amid speculation the Bank of Japan may take steps that would tighten monetary policy sooner than expected.
The U.S. currency was quoted almost 1.3% lower at 117.85 yen, having fallen back from Monday's highs over 119 yen. The dollar last traded below 118 yen on Jan. 31.
The euro was up 0.02% at $1.1982.
The Bank of Japan will hold a monetary policy meeting on Wednesday and Thursday. Traders will carefully monitor the statements of Bank of Japan Governor Toshihiko Fukui following the meeting.
Recent comments from Bank of Japan officials acknowledging improvements in economic fundamentals have led some people to speculate a change could come as soon as a meeting on Thursday, said Russell Bloom, senior currency analyst at IFR Forex Watch.
The market was heavily short on yen, said Bloom. So the speculation resulted in "a massive unwinding of yen shorts," he said.
The Bank of Japan, in a move that would be bullish for the yen and bearish for the dollar, could tighten policy by terminating its "quantitative easing policy," under which the bank is targeting a current account reserve of 30 trillion to 35 trillion yen.
Action Economics predicted that the central bank will announce at its April meeting an end to quantitative easing and readopt its zero interest rate policy.
"A modest tightening in the nominal call rate can be expected from as early as the end of the second quarter of 2006 to prevent further falls in the real rate as inflation turns increasingly positive," Action Economics said.
The call rate is the rate charged for unsecured overnight loans of deposits at the bank.
Boris Schlossberg, senior currency analyst at Forex Capital Markets, said the yen benefited from heavy funds demand during European trade.
"How accurate that information is remains to be seen as Bank of Japan officials have been reticent at making any definitive assurances to the market," Schlossberg said.
He also noted that a newsletter speculated that the Bank of Japan could hint at an end to the zero interest rate policy, but said that possibility was questionable.
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