The yen rose broadly and climbed over two percent against the Australian dollar on Tuesday after Australia's central bank caught investors off guard with a bigger-than-expected rate cut. The Reserve Bank of Australia (RBA) cut its key benchmark cash rate 75 basis points to 5.25 percent on Tuesday.
Surprising market players who had been expecting a 50 basis point cut, as it battled to save the economy from a global recession. Australian dollar fell against the dollar and yen after the RBA rate cut, which stirred talk that the European Central Bank and the Bank of England may also cut interest rates more sharply than expected later in the week.
Traders said the yen's rise against the Australian dollar helped the Japanese currency to strengthen against other higher-yielding currencies. "The focus is now on the central banks move in Europe, especially the European Central Bank. Surely, there is a possibility that the ECB and the Bank of England may conduct larger than expected rate cuts," said Kazuyuki Kato, treasury department manager at Mizuho Trust & Banking.
The Australian dollar fell around 2.4 percent against the yen to 65.43 yen, according to Reuters data, and was down around 2 percent against the dollar at $0.6627. The euro fell by as much as 1.5 percent to 123.43 yen on trading platform EBS after the RBA's rate decision, but later trimmed its losses to stand at 124.35 yen, down 0.8 percent on the day.
That euro fell to a 6-1/2 year low of 113.62 yen on EBS in late October, as fears of a global recession prompted investors to abandon risky assets and unwind carry trades, which used the low-yielding yen to buy higher-yielding currencies and assets. The dollar slipped 0.5 percent to 98.62 yen.
Traders said the dollar may have a hard time rising above the psychologically important 100.00 yen level in the near term as Japanese exporters were seen likely to sell dollars to repatriate their profits near that level.
Many exporters are assuming a dollar/yen exchange rate of 100 yen in their business plans for the fiscal year ending in March, they said. Ahead of the rate decisions by the ECB and the BoE this week, investors also await the results of the US presidential election on Tuesday. Democrat Barack Obama has led the presidential race in every national opinion poll since late September, but Republican John McCain is still hoping to pull off a historic upset.
Even so, a victory by Obama is unlikely to change the dollar's long-term slide against the yen, Uno said. The US currency may fall back towards a 13-year low of 90.87 yen, which was hit late in October, before the year ends, he said. Central banks around the world have been lowering in43 yen on trading platform EBS after the RBA's rate decision, but later trimmed its losses to stand at 124.35 yen down 0.8 percent on the day.
That euro fell to a 6-1/2 year low of 113.62 yen on EBS in late October, as fears of a global recession prompted investors to abandon risky assets and unwind carry trades, which used the low-yielding yen to buy higher-yielding currencies and assets. The dollar slipped 0.5 percent to 98.62 yen.