Dollar gives up gains after Japan stops short of extra QE

[December 18, 2015]    By Patrick Graham

LONDON (Reuters) - The dollar fell more than a third of a percent against a basket of major currencies on Friday, hurt by a resurgence of the yen after the Bank of Japan chose to tweak rather than expand its monthly asset-purchase program.

The dollar’s move, after the Federal Reserve raised interest rates for the first time in almost a decade on Wednesday, also reflected concern over the impact of a stronger U.S. currency both on the United States and on emerging economies.

A decline in Thursday’s Philly Fed survey in the United States was the latest evidence of how much U.S. companies have already been squeezed by the dollar's 23 percent appreciation since the middle of 2014.

"(That was) another 'Rate hikes? Really?' message from the part of the US economy still trying to actually make things," said Michael Avery, Rabobank's head of financial markets research for Asia-Pacific. "Given that the USD index jumped from 98.4 to 99.0 on the day, we should expect more of that to come."
 

The dollar fell 1 percent to 121.25 yen after the Bank of Japan's announcements. It was flat against the euro at $1.0826. The dollar index overall was down 0.4 percent at 98.905.

Dealers and analysts in London stressed liquidity was low and said the dollar's decline looked like a minimal retracement of its gains after the Fed decision on Wednesday, when it rose more than 1 percent.

"We had a big move higher and today we're coming back a bit," said Lee Hardman, a strategist with Bank of Tokyo-Mitsubishi UFJ in London.

Onshore rates for China’s yuan fell for a 10th consecutive day, but the offshore market where most international trading occurs was steadier, recovering from its weakest showing since a devaluation of the currency in August.

"Everyone is just waiting to see whether this steady depreciation will be allowed to continue," BTM's Hardman said.

"There's always the risk with volumes lower at the end of the year that the PBoC might come into the market and try and flush out some of the speculative money (betting on a weaker yuan)."

The big remaining risk for this year is twofold: Spain's election on Sunday might send another political shock through the euro zone and euro zone debt markets, and lack of liquidity may see some sharper moves out of line with broader trends.

"The market is definitely thinning off. A lot of people are complaining about a lack of liquidity," said a currency analyst with one bank in London. "Everyone is aware from the past couple of years that in an environment like this we can see some big moves."

(Editing by Larry King)

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