The yen fell to a fresh record low against the euro on Thursday as investors met comments from the Bank of Japan governor about plans to raise interest rates with scepticism.
Toshihiko Fukui, the central bank governor, said the BoJ planned to raise rates “gradually, and as much as possible” to regain the ability to influence the development of the economy though monetary policy.
But Paul Chertkow at Bank of Tokyo-Mitsubishi UFJ was cautious about the BoJ’s ability to continue raising rates.
He said: “The Bank of Japan will continue to be constrained by the two parameters for the conduct of monetary policy set following the abolition of quantitative easing last March: the outlook for growth and the outlook for inflation.”
Mr Chertkow said wage increases were expected to remain low and, as a result, private consumption looked likely to contribute less to real gross domestic product growth this quarter than it did in the last.
“In the absence of an upturn in wage increases, inflationary pressures are likely to remain negligible,” said Mr Chertkow.
On Wednesday the BoJ raised its overnight rate by 25 basis points to 0.5 per cent. Governor Fukui however, cushioned the markets from the effect of the move when he said later that the BoJ would continue to “support the economy by creating accommodative monetary conditions with very low rates for a while”.
Daragh Maher, strategist at Calyon, said: “The BoJ is unlikely to follow up the hike with swift action which means the yen will not enjoy some of the rate-related speculative support that has been evident ahead of recent meetings.”
By mid-afternoon in New York, the yen was down 0.2 per cent against the euro to Y159.15, having earlier hit a record low of Y159.40. Meanwhile the yen dropped 0.4 per cent to Y121.41 against the dollar and 0.5 per cent to Y237.20 against the pound.
Like the yen, the Swiss franc has also been weakened by the effects of carry trades - in which investors fund long positions in high-yielding assets by selling low-yielding currencies - as the overnight rate of the Swiss National Bank stands at 2 per cent, the lowest borrowing cost of any major economy outside of Japan.
Comments on Wednesday from Jean-Pierre Roth, chairman of the Swiss National Bank, that the dangers of the carry trade and the weakness of the franc required “vigilance”, had only a temporary effect on the currency’s slide.
“If the SNB is serious then it will either have to get ahead of the game on interest rates or think about some sort of covert intervention,” said Chris Furness at 4Cast, the economic consultancy.
The dollar gained 0.3 per cent against the Swiss franc to SFr1.2410, while the euro climbed 0.1 per cent to SFr1.6278.
Elsewhere, the dollar hit a one-week high against the euro, garnering support from the minutes from the January policy meeting of the Federal Reserve, which showed the open market committee remained hawkish on inflation.
All members of the FOMC agreed that inflation risks remained and that additional policy tightening might be necessary.
However, Daniel Katzive, currency strategist at UBS, said that the dollar’s strength was unlikely to last. “Going forward, we continue to believe that the balance of data in the coming weeks will tend towards the weak side, prompting the market to price more risk of Fed easing and further undermining the dollar,” he said.
The dollar rose 0.2 per cent to $1.3110 against the euro and climbed 0.1 per cent to $1.9520 against the pound.
Sterling edged 0.2 per cent higher to £0.6715 against the euro as data showed that UK business investment grew at its fastest pace in more than a decade in the fourth quarter.