The yen nursed broad losses on Monday and the euro struggled for traction after the Bank of Japan adopted negative interest rates, heightening expectations that the European Central bank will ease policy too, making European bond yields slide. The dollar was up 0.2 percent at 121.30 yen, after having jumped nearly 2 percent on Friday - its biggest one-day rally in over a year.
A survey of Chinese manufacturers that showed factory activity contracted for an eleventh straight month in the world's second largest economy hit Chinese stocks, but fell short of inspiring safe-haven flows in the yen. Some analysts believed that the BoJ's surprise easing was partly aimed at forestalling the yen's appreciation, after the currency firmed to its strongest in a year last month when safe haven flows poured in amid a rout in global equity and crude oil markets. The dollar touched 115.97 yen, its weakest since January 2015.
The BoJ said Friday it will charge 0.1 percent interest on current accounts that financial institutions hold at the central bank in an effort to stimulate the economy and prevent a deflationary mindset from taking hold. "Until recently, BoJ Governor (Haruhiko) Kuroda openly denied the possibility of lowering interest rates on current account deposits. The central bank may have considered the latest meeting as a chance to cause a strong surprise after seeing market expectations towards lower rates subside broadly," wrote Naohiko Baba, chief Japan economist at Goldman Sachs in Tokyo.
"Furthermore, Kuroda added that the central bank is ready to lower rates further if needed. This was likely aimed to keep retaining the currency market's attention and prevent the yen from rising." The market will no doubt be keeping a close eye on the BoJ's next move, but the central bank may have already used one of its main weapons -the element of surprise.
"It remains to be seen if the yen can stay weak if global risk aversion takes hold again. Market players will be wary of the BoJ taking action in that case, but they may conclude that the central bank won't step in until dollar/yen falls into the 116 range," said Koji Fukaya, president of FPG Securities in Tokyo. "The BoJ can lower interest rates further into negative territory, but the impact could be limited. For example the ECB did deepen negative deposit rates in December but this was considered a disappointment."
The BoJ's move to adopt negative rates on Friday only cemented expectations the European Central Bank would ease further, sending German two-year yields to a fresh trough of nearly 50 basis points below zero.
That weighed on the euro, which was last at $1.0851, up 0.2 percent but well off last week's high of $1.0968. The common currency also pared gains on the yen, stepping back to 131.53 from a one-month high of 132.45. Weakness in both the euro and yen helped drive the dollar index back towards 100.00. It traded at 99.462, just off Friday's peak of 99.829. The Australian dollar, often used as a proxy of China-related trades, was down 0.2 percent at $0.7069.
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