The yen sagged on Thursday on news that Japan's public pension fund plans to increase its allocation to the domestic stock market, while the euro held steady as investors awaited details of the European Central Bank's latest outlook on policy. The dollar rose 0.2 percent to 102.33 yen, pulling away from a 1-1/2 week low near 101.76 yen set on Wednesday. After a bullish month of trading which has raised expectations of a longer-lasting rally, the greenback was just below 11-month highs against a trade-weighted basket of major currencies.
The ECB, as widely expected, kept interest rates on hold, but analysts said the euro was likely to move on the tone of President Mario Draghi's comments on the struggling euro zone economy at a news conference starting at 1230 GMT. Inflation in the single currency area was just 0.4 percent in July, while Italy has sunk back into recession and data from Germany this week was poorer than expected, all adding to the pressure on the bank to do more soon to stimulate growth.
"The rate of inflation will no doubt be an issue on which Mario Draghi will have to comment in the press conference," analysts from Commerzbank said in a morning note. "Should he sound too concerned at this juncture this might put pressure on the euro. The increasingly difficult relations with Russia are no doubt going to be an issue as well."
The euro was broadly flat at $1.3370 after the decision on rates. Daragh Maher, a currency strategist with HSBC in London, said Draghi could sidestep all questions essentially by saying that he has to wait and see what impact the policy measures taken in June have. "But I think the sensible questions will be about whether the downside surprises we have seen make it more likely the ECB will take further steps," he said.
"I think the balance of risks is against the euro." The action overnight was all about the yen and the Australian dollar, the latter falling almost 1 percent to a two-month low after data showed a rise in the Australian jobless rate. The yen, attractive for investors seeking shelter from growing tensions between the West and Russia, weakened as Tokyo shares pushed higher after sources told Reuters that Japan's Government Pension Investment Fund (GPIF) plans to put over 20 percent of its funds in domestic stocks. That compares with a current 12 percent target.
Gains in equities tend to weigh on the safe-haven yen, as investors target riskier assets on expectations of making bigger returns. "It is that news on the GPIF that has moved dollar-yen this morning," said Maher. "We had some peculiar price action late yesterday that is also being retraced, but the GPIF story gave a fundamental rationale for the push higher."
The Aussie, hammered by an unexpected jump in the domestic jobless rate, was down 0.9 percent at $0.9268 in early European deals. It fell to $0.9263 at one point, its lowest level since early June. "The Aussie had been holding up better than the New Zealand dollar and the data are a perfect excuse for some catch-up," said Kit Juckes, a currency strategist with French bank SG in London.
"Hopes of a chance to sell the Aussie back above 0.94 have faded significantly. The Australian/US rate differential is pointing firmly downwards for the currency from here." The Reserve Bank of Australia kept its cash rate at a record low of 2.5 percent on Wednesday, but the jobs numbers underlined continuing worries over the economy's growth prospects after the end of a mining investment boom.
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