Dollar gains after Bank of Japan changes policy framework

The dollar jumped on Wednesday after the Bank of Japan (BoJ) altered its policy framework, and investors bought back the US currency ahead of the outcome of the Federal Reserve's policy meeting later in the session.

Japan’s central bank, overhauling its massive stimulus programme, decided to scrap its focus on monetary base and set targets for long-term rates.

The BoJ maintained the 0.1 per cent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank.

But it abandoned its base money target and instead set a “yield curve control,” under which it will buy long-term government bonds to keep 10-year bond yields around current levels of zero per cent.

The dollar was up 0.8 per cent at 102.54 yen, after rising to a nearly one-week high of 102.67.

Supportive

“The monetary base was abandoned, which could be supportive for the dollar, overall,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

“Many people expected the BoJ not to take any action at all, and the yen to strengthen, so we now see many people buying the dollar back,” he said.

The euro surged 0.7 per cent to 114.17 yen after earlier dropping as low as 112.50, its lowest since August 16th.

Against the dollar, the European unit was down 0.2 per cent at $1.1133.

Japanese data released earlier on Wednesday showed exports fell 9.6 per cent in August from a year earlier, posting an 11th straight month of decline.

In addition to the BoJ, investors’ attention is also on the Fed. The US central bank is widely expected to hold interest rates unchanged at 0.25 per cent to 0.50 per cent, and could hint at a rate hike by the end of the year.

Weak US data

Weaker-than-expected US economic data has prompted investors to call off bets for a Fed rate hike on Wednesday.

On Tuesday, data showed US housing starts fell more than expected in August as building activity declined broadly after two straight months of solid increases.

The British pound steadied after tumbling in the previous session, extending its losses after the head of Germany's Bundesbank warned on Monday that banks based in Britain could lose "passporting" access to European Union markets after Britain's pending exit from the bloc.

Sterling was down 0.2 per cent at $1.2958 after skidding to $1.2946, its lowest since August 16th.