Yen gains on dollar and euro as Bank of Japan holds steady
By Deborah Levine and V. Phani Kumar, MarketWatch
NEW YORK (MarketWatch) — The euro edged up Friday, leaving the shared currency on pace for a 1% gain for the week, in subdued trading activity ahead of Greece’s weekend elections.
The shared currency gained during the Asian session following a report out late in the prior session saying central banks were preparing coordinated efforts to provide liquidity, if necessary, after the Greek poll.
The euro EURUSD +0.00% rose to $1.2625, from $1.2613 in North American trading late Thursday. Prior to that, the shared currency hadn’t closed above $1.26 since May 22.
It’s up 1% from a week ago, on pace for its biggest advance since mid-April.
The dollar index DXY -0.26% , which measures the greenback against a basket of six major currencies, dropped to 81.716 from 81.917 Thursday.
It’s fallen 1% this week, which would be its biggest drop since late February.
Traders are heavily positioned for a further decline in the euro, which could mean some reversal of those positions given the unknown outcome, strategists said.
“There is something of a hint of risk appetite on the markets ahead of the Greek elections this weekend,” said currency strategists at Commerzbank.”We do not believe that this move will continue much further today. In the end investors will not want to enter larger new positions ahead of the elections.”
Heightened uncertainty surrounds about whether the Greek populace will choose a party that backs the existing bailout or one that rejects it, raising the risk that the country will try to exit the euro zone. Read more about runup to Greece’s election.
“The costs of a near-term Greek exit are too high for either Greece or the euro area,” said Antonio Garcia Pascual, analyst at Barclays Capital. “A disorderly exit would likely lead to a massive run on bank deposits, a meltdown of the Greek banking system, and further aggravation of Greece’s large economic downturn. For the euro area, the main cost would be contagion, with the risks potentially enormous.”
The euro jumped above $1.26 late Thursday after a report indicated that central banks are preparing for coordinated action to provide liquidity if necessary after Greece’s elections. Read more in Thursday’s dollar report.
“These rumors are hardly credible as they fail to convince,” Commerzbank strategists wrote in emailed comments. “Just in case anyone has failed to notice: the markets have been flooded with liquidity over the past few months and at least in the euro zone there is no evidence of a credit crunch (i.e., banks refusing to offer loans despite strong demand). Further liquidity flows would hardly do the trick.”
Bank of Japan hangs back
The biggest mover among major currencies was the Japanese yen, which jumped after the Bank of Japan left its interest rates and size of monetary stimulus unchanged, holding back on policy actions ahead of the weekend Greece elections. Read more on the Bank of Japan decision.
Less easing tends to be positive for a currency, but Japanese officials have also often said they don’t want a stronger yen because of its impact on exporters.
“The experience of the last 20 years in Japan should act as a warning to policy-makers everywhere that excessive timidity in the wake of burst asset bubbles can doom your economy to deflationary depression,” he said.
The dollar USDJPY -0.89% dropped to ÂĄ78.72, from ÂĄ79.33 Thursday.
The euro EURJPY -0.89% retreated to ÂĄ99.42 from ÂĄ99.74.
Among other major currencies, the British pound GBPUSD +0.56% traded at $1.5642 from $1.5553, shrugging off increasing calls that the Bank of England will ease further. Read more on Bank of England.
Barclays strategists said they now expect officials to approve a further ÂŁ50 billion in quantitative easing next month.
“We expect the asset purchases again to be exclusively of gilts,” they wrote in a note. “The primary reason for our change of view is the deepening of the euro crisis, following the renewed turbulence in Spain.”
Deborah Levine is a MarketWatch reporter, based in New York.
Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.
