The yen rose broadly on Monday after the Bank of Japan's (BoJ) decision to expand cheap loans to banks disappointed investors who had looked for more aggressive measures to curb the yen's strength. The dollar fell below 85 yen and the euro lost more than 1 percent against the Japanese currency after the BoJ beefed up the supply of fixed-rate loans to banks to 30 trillion yen ($351 billion) from 20 trillion yen.
Investors saw the central bank's moves as a symbolic gesture that will do little to halt the yen's climb, putting the onus on the Japanese government to act to protect exports and fight deflation if the yen continues to rally.
In late afternoon trading, the dollar fell 0.7 percent to 84.60 yen, down from the day's high above 85.92 hit before the BoJ announcement, according to Reuters data. The dollar earlier hit a session low of 84.56 yen, not far from its 15-year low of 83.58 yen set on electronic trading platform EBS last week. "The yen will probably stay exactly where it is now, said Nick Bennenbroek, head of currency strategy at Wells Fargo. "Clearly, additional monetary policies and extra funds that the Bank of Japan added aren't enough to see the yen weaken."
Adding to strength in the yen were comments from Bank of Japan Governor Masaaki Shirakawa, who said after meeting with Prime Minister Naoto Kan that Kan had not made any requests regarding the central bank's monetary policy. Shirakawa refused to comment on recent currency moves. A trader said stop-loss orders to sell the dollar under 84.90 yen helped accelerate the pair's slide. Support comes in at around 84.50, while resistance is at 86 yen. The euro fell 1.2 percent to 107.36 yen.
Aside from the yen, currency movements were limited in European trade, with London markets closed for a holiday. The euro lost 0.8 percent to $1.2661, as losses in the US stock market weighed on risk appetite. Investors are now turning attention to the release on Tuesday of minutes from the US Federal Reserve's August 10 meeting to get further insight into why policy makers opted to buy more Treasury securities.
Following that is the widely watched US non-farm payrolls report on Friday. In fact, using yen to fund the carry trade has not been a good strategy in 2010 to date, according to Reuters data. Borrowing 1 million yen to buy the equivalent in New Zealand dollars would have lost an investor 93,415.61 yen; buying Australian dollars would have lost an investor 66,266.38 yen.