The yen tumbled, reaching the weakest level in almost four years against the euro, as the Federal Reserve unexpectedly retained a monetary policy that prompts investors to borrow in low-interest-rate currencies to buy higher-yielding assets.
Japan’s currency slid against all 16 of its major peers after a central-bank policy maker said pressure may mount to expand stimulus. The dollar fluctuated against the euro after falling to a seven-month low as Fed policy makers maintained monthly bond purchases at $85 billion. Malaysia’s ringgit surged the most since 1998 and India’s rupee advanced. The pound weakened after U.K. retail sales unexpectedly fell.
“Carry trades are being carried out in a selective fashion,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York, said in a phone interview. “The large bearish long-dollar/short-Group of 10 currencies are being unwound.” A long position is a bet that an asset will increase in value.
The yen dropped 1.6 percent to 134.56 per euro at 5 p.m. New York time, after touching the weakest since Nov. 12, 2009. The Japanese currency slid 1.5 percent to 99.45 per dollar after appreciating to 97.76 yesterday, the strongest level since Aug. 29. The U.S. currency slipped 0.1 percent to $1.3530 per euro after reaching $1.3569, the weakest since Feb. 7.
The MSCI Asia Pacific Index of shares advanced 1.7 percent, while the Stoxx Europe 600 Index gained 0.6 percent. The Standard & Poor’s 500 Index slipped 0.2 percent.
Takahide Kiuchi, the Bank of Japan board member most openly critical of its monetary policy, said the central bank may come under pressure to expand easing. “I can’t deny the possibility that the Bank of Japan will be influenced by external factors such as market expectations and will be forced to respond in such a way,” Kiuchi said.
In the carry trade, investors borrow in low-interest-rate currencies to buy higher-yielding assets. Japan’s benchmark rate is virtually zero.
The Malaysian ringgit climbed 2.4 percent to 3.1565 per dollar after gaining 2.8 percent, the biggest intraday advance since September 1998. India’s rupee surged 2.5 percent to 61.7750 versus the U.S. currency.
“Yesterday’s initial reaction was to clear out long dollar-yen positions, now we’re returning to the typical risk-on scenario,” said Michael Sneyd, a foreign-exchange strategist at BNP Paribas SA in London. “The currencies that correspond to carry trades, the Aussie, Kiwi are doing well, while the yen is doing badly.”
South Africa’s rand depreciated for the first time this week as investors gauged a surge to a four-month high against the greenback was overdone.
South Africa’s currency depreciated 1.2 percent to 9.7053 per dollar after strengthening as much as 0.4 percent earlier to the strongest level since May 24.
New Zealand’s dollar was little changed after rallying as much as 0.8 percent as a government report showed gross domestic product grew 2.5 percent in the three months through June 30 from a year earlier, beating the median forecast of 2.3 percent in a Bloomberg survey.
The kiwi traded at 83.74 U.S. cents, after reaching the highest since May 9.
Sterling weakened from almost an eight-month high against the dollar after data showed U.K. retail sales including fuel declined 0.9 percent from July. The median forecast of 20 economists in a Bloomberg survey was for a 0.4 percent gain.
The pound declined 0.7 percent to $1.6032 after climbing to $1.6163 yesterday, the most since Jan. 11. It fell 0.8 percent to 84.40 pence per euro.
Fed policy makers said they want more proof of an economic recovery before curbing their asset-buying program, known as quantitative easing, surprising analysts predicting a $5 billion cut to Treasury purchases.
Fed Chairman Ben S. Bernanke said there is no fixed schedule for tapering, which could still start this year. Interest rates will stay near zero while unemployment exceeds 6.5 percent and inflation tops 2.5 percent, the Fed said in a statement.
“The Fed statement was noticeably dovish,” said Yuki Sakasai, a foreign-exchange strategist in New York at Barclays Plc. “There is expectation that there may be more QE.”
The dollar declined 1.8 percent in the past week, the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen lost 1.9 percent and the euro gained 0.2 percent.
Trading in over-the-counter foreign-exchange options totaled $32 billion, from $24 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $6.6 billion, the largest share of trades at 21 percent. Options on the euro-dollar rate totaled $6 billion, or 19 percent.
Dollar-yen options trading was 35 percent more than the average for the past five Thursdays at a similar time in the day, according to Bloomberg analysis. Euro-dollar options trading was 228 percent more than average.