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Dollar set for weekly loss as markets cool before BOJ, Fed

[September 16, 2016] By Patrick Graham

LONDON (Reuters) - The dollar was on course to fall for a second week against the yen on Friday after U.S. retail sales data quelled lingering bets on the Federal Reserve raising interest rates next week, while faith in Bank of Japan action against its currency also seems limited.

The past week has been dominated by a rethink on debt markets about the outlook for central bank policy in Europe and Japan. One currency leg of that looks to be the growing lack of belief that officials can do much to weaken either the euro or yen if the U.S. Federal Reserve does not raise interest rates.

The yen gained 0.2 percent to 101.84 per dollar, putting it up 0.7 percent for the week. Helped by a small gain against the euro and a half percent fall in sterling, the dollar index which measures its broader strength was just up at 95.483. <.DXY>

"The Fed is looming in about five days. Until then we doubt that the dollar is going to swing either way," said Alexandre Dolci, a strategist at Spanish bank BBVA in London.

"If anything we may see more about the yen and this is what the option market is pricing in. Given that the BoJ has had a good track record for disappointing the market since the start of the year, the risk is the yen could strengthen a little bit against the other majors."

He said his bank had a target of 108 yen per dollar for the end of the year, predicated on the Fed raising interest rates in December, although that seemed subject to risks from November's U.S. presidential elections.

"Explicitly they can't say anything (about Trump)," he said. "But we think they would want to see further the reaction of the market to figure out what to do on interest rates (if he wins)."

The Fed and the Bank of Japan both issue their decisions on interest rates and other policy parameters next Wednesday.

Bank of England policymaker Kristin Forbes focused on the positive fallout of a drop in the pound since Britain's vote in June to leave the European Union, pointing to the positive impact on Britain's large current account deficit.

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After three solid weeks of gains, sterling was down 0.6 percent on the day against the dollar on the day and 0.7 percent on the week. <GBP=D4>

"We still like the view of a weaker pound," said Citi strategist Josh O'Byrne.

"The Bank of England was slightly more dovish than the market thought they could be (yesterday). They highlighted the positive surprise on the data. But really the guidance (on their willingness to ease policy further) was more or less unchanged."

Financial markets are pricing in a roughly 12-percent probability of a Fed rate hike next week, down from 15 percent before the data, according to the CME FedWatch tool.

The BOJ is due to conduct a comprehensive review of its current policy framework that combines negative interest rates with a massive asset-buying program.

Many market players expect it to indicate a preference for a steeper yield curve to cushion the blow on banks from negative interest rates, but there is also focus on whether the central bank will cut rates deeper into negative territory.

"I think the market has somewhat priced in a (rate) cut as well as a tweak to the QE program," said Sim Moh Siong, FX strategist for Bank of Singapore. "If the BOJ stays put, then I would expect the yen to come under some appreciation pressure, especially if the Fed stays put as well."

(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Andrew Heavens)

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