The dollar fell against the yen on Thursday as expectations faded that the Bank of Japan would deliver the radical stimulus package some had expected this week, and after the US Federal Reserve stopped short of flagging a near-term rate rise. Expectations for action are still high, nevertheless, and the price of hedging against big swings in the dollar/yen exchange rate over the next 24 hours surged above 50 percent on Friday for the first time since late 2008.
The dollar fell 0.7 percent to 104.72 yen. "There are wide expectations for some action from the BoJ tomorrow, but there's huge variance around those expectations," said Societe Generale currency strategist Alvin Tan, in London. "The baseline expectation is that the BoJ will increase some asset purchases tomorrow and also perhaps cut interest rates by a small amount, perhaps by 10 basis points. The big risk is if they didn't do anything."
Japan's prime minister unveiled a surprisingly large 28 trillion yen ($265 billion) stimulus package on Wednesday, putting pressure on the central bank to match it with aggressive monetary easing and fuelling speculation that unconventional policies like "helicopter money" - giving cash directly to businesses and consumers - might be on the cards. But informed sources told Reuters earlier on Thursday the government is planning direct fiscal spending of 7 trillion yen to help fund the stimulus package which, at just a quarter of the total package, could disappoint some market players bracing for bigger outlays given the headline figure.
"People were thinking that the larger the fiscal stimulus package, the more likely that the government would have to co-ordinate with the BoJ and that would increase the likelihood of some form of helicopter-money-type announcement tomorrow," Bank of Tokyo-Mitsubishi UFJ currency economist Lee Hardman said in London. "But the reality is that the BoJ won't be making that kind of announcement The market was too optimistic in expecting more aggressive easing from Japan, and those expectations are being pared back."
A Citi survey of its clients and financial institutions earlier this month showed 80 percent expected the dollar to fall more than 3 percent against the yen if the BoJ stands pat on Friday and does not signal any action in September. More than 30 percent think the drop would be more than 4 percent.
The Fed, meanwhile, said on Wednesday after its two-day policy meeting that it was less worried about possible shocks to the US economy, suggesting that a hike as early as September was not out of the question though not signalling it clearly. The dollar index, which tracks the US unit against a basket of six major rivals, slipped 0.7 percent to a two-week low of 96.343. That put it on track for its biggest one-day fall in eight weeks.
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