Euro struggles after weak Eurozone data

London: The yen fell sharply on Thursday after the Bank of Japan announced aggressive measures to ease monetary policy, including a plan to double its holdings of bonds and stocks in two years.

In contrast, the European Central Bank kept interest rates on hold, helping the euro pare losses against the dollar. The single currency was down on the day, however, following weak euro zone economic data.

Investors will now focus on ECB President Mario Draghi’s news conference at 1230 GMT, when he is expected to highlight a bleak economic outlook while seeking to calm investors’ fears about the repercussions of the Cyprus bailout.

“How Draghi views the Cypriot legacy is going to be important for the euro and, after the data we have had this week, whether he sets the tone for an interest rate cut further down the line,” said Jane Foley, senior currency strategist at Rabobank.

“But the bigger theme of the day is the BOJ.”

Analysts and traders expected further broad losses in the yen after the Bank of Japan’s (BOJ) bold steps, with the potential for the dollar to rise towards 100 yen.

India’s rupee fell to the lowest level in almost a month on concern slowing capital inflows will leave the currency more vulnerable to a current-account deficit.

Overseas funds bolstered holdings of Indian stocks by $1.9 billion in March, exchange data show, after adding more than $4 billion in each of the previous three months. The shortfall in the broadest measure of trade was $32.6 billion in the quarter through December, a central bank report showed March 28. India needs a plan to tackle the deficit and the government will take steps to boost investment from abroad, Prime Minister Manmohan Singh said in New Delhi yesterday.

The rupee weakened 0.8 per cent to 54.8850 per dollar in Mumbai, data compiled by Bloomberg show. It touched 54.8975 earlier, the weakest level since March 7. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell three basis points, or 0.03 percentage point, to 7.84 per cent.

The dollar rose as much as 2.7 per cent to 95.69 yen, climbing closer to a 3-1/2 year peak of 96.71 set on March 12. It was last trading at 95.42 yen, up 2.5 percent on the day.

The euro also gained strongly against the Japanese currency, and was last trading up 2.3 per cent at 122.26 yen.

Traders said the yen’s falls were all the greater because before the announcement the market had prepared for the BOJ to deliver less than expected, as it had done in the past.

“The BOJ has set in play a very aggressive expansion of monetary policy and it’s very likely dollar/yen will continue to rise,” said Lee Hardman, currency economist at BTMU, adding the dollar could hit 100 yen in the next three to six months.

The BOJ shocked markets in what was seen as a radical overhaul of policymaking, shifting the policy target to the monetary base from the overnight call rate and ditching its previous stance of shunning long-term bonds.

The yen extended losses as BOJ governor Haruhiko Kuroda said he would not hesitate to adjust policy further.

Market players said Japanese institutional investors were also likely to increase overseas investments, which could trigger “the next leg” in yen weakness.

The BOJ’s new plan means it will buy about 7 trillion yen ($73 billion) of bonds per month, equivalent to about 1.4 percent of GDP. By comparison, the US Federal Reserve buys $85 billion of bonds — about 0.6 per cent the size of the economy.

Gains against the yen and the euro pushed the dollar to an eight-month high against a basket of currencies, with its index rising to 83.390.

- Reuters