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BoJ resistance weakens yen as euro stays steady

The yen edged lower against the dollar and the euro on Friday after the Bank of Japan resisted calls for further stimulus to spur an economy already weakened by the impact of the earthquake.

Traders reported light selling of the yen, pushing the currency to ¥81.75 against the dollar, compared with ¥81.50 in early Asia trade, while it slipped against the euro to ¥117.10, compared with ¥116.78 previously.

The Bank of Japan decided to leave in place a ¥30 trillion ($367 billion) credit program and a ¥10 trillion asset-purchase fund, rather than increasing stimulus to offset slowing economic growth, as the country struggles to escape the effects of March’s devastating earthquake.

“We had hoped the central bank would have been more positive,” says Jonathan Cavenagh, a currency strategist at Westpac Banking Corp in Singapore. “Still, given relative value on spreads between the US and Japan, we reckon the en should be capped at around 82.”

Japan’s gross domestic product contracted an annualized 3.7% in the three months through March, the Cabinet Office said on Thursday.

Elsewhere in Asia, Singapore raised its growth forecast for 2011 to between 5% and 7%, from an earlier estimate of 4% to 6%, prompting speculation that policy makers will shift the policy band for controlling the local currency higher by around 1%.

“Inflation has probably peaked but we suspect there will still be some policy reaction,” says Dennis Tan, a currency analyst at Deutsche Bank in Singapore. Singapore’s economy grew at a record 14.5% in 2010, and the dollar has risen 13% against its US counterpart in the past year.

The currency climbed the most in a month in trading today (Friday) to as high as $1.2391 following the growth estimate, traders say, before falling back to $1.2351 late in the day.

Singapore monetary authorities operate a managed float regime for the dollar, allowing the trade-weighted exchange rate to fluctuate within an undisclosed policy band, rather than targeting a fixed value.

The euro was little changed against the dollar early Friday as concern over the Greek debt crisis in Europe was offset by a report late on Thursday of weaker-than-expected growth in US mid-Atlantic factory activity and falling home sales.

The Philadelphia Federal Reserve Bank says its business activity index slumped to 3.9 in May from 18.5 in April.

“The question is whether this a speed bump on the road to recovery or something more sinister,” says Westpac’s Cavenagh. “Still, worse economic news may be positive for the dollar as it will prompt an exit from risky assets.”

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