The dollar and the yen edged up on Thursday as short-term investors and Japanese exporters sold into a rally in the euro and higher-yielding currencies which followed a repeated pledge by the U.S. Fed to keep rates low for a while.
With the Federal Reserve meeting out of the way, eyes were on rate decisions by the European Central Bank and the Bank of England later in the day, which along with U.S. jobs data on Friday were helping to keep a lid on big moves. [ECB/INT] [BOE/INT].
But the dollar and yen were expected to remain under pressure longer term following the Fed's pledge on low rates, a stance market players said was likely to fuel leveraged carry trades and boost demand for high-yielding currencies like the Australian and New Zealand dollars.
What we saw was a pick up of dollar and yen carry trades after the Fed's commitment to an easy policy, and the momentum is likely to remain, said a trader at a Japanese trust bank.
The U.S. dollar index .DXY, which measures the dollar's value against a basket of currencies, inched up 0.3 percent to 75.863, pulling away from a low of 75.60 struck on Wednesday which was its weakest level in over a week.
It hit a 14-month low of 74.94 in late October and has been holding in a downtrend since March.
The euro EUR= dipped 0.1 percent to $1.4840, having added more than 1.0 percent on Wednesday.
It has been in a correction since late October but Citi analysts said in a client note that as it had not dropped through its 55-day moving average after dipping to test it this week, the correction could be coming to an end.
Against the yen the euro lost 0.5 percent to 134.18 yen EURJPY=R after surging more than 1.4 percent in the previous session to its highest this week.
Traders said the euro's surge drew selling interest from Japanese exporters, some of whom had lowered their selling targets in the wake of the yen's recent appreciation.
The dollar fell 0.3 percent to 90.44 yen JPY=. Traders said there was talk exporters were ready to sell dollars at about 91.00 yen.
Still, investors are expected to be wary of selling dollars too aggressively as the Fed appeared to be more confident about an economic recovery in its latest statement.
While this situation supports continued efforts at accommodation, credit easing is being capped off and officials are focusing more explicitly on conditions that would signal a retreat, said Robert DiClemente, chief U.S. economist at Citi.
Traders have said this week that economic data could take on greater significance to the market as it tries to gauge when the Fed will change its tone, with jobs data on Friday in focus.
But traders would also be watching equity market performance to gauge investors' appetite for risk ahead of year-end book closing and financial sector performance.
Tokyo's Nikkei average .N225 shed 1.2 percent on Thursday and the MSCI index of Asia Pacific stocks excluding Japan .MIAPJ0000PUS was down 0.7 percent.
FED OVER, ECB AND BOE TO COME
Market watchers expect the ECB to keep interest rates at a record low 1.0 percent at its meeting on Thursday.
The central bank is expected to offer few indications that it would veer from its loose monetary policy soon, although analysts are keeping a close eye on any mentions of exit strategies.
Analysts are split on whether the BoE will expand its quantitative easing policy by 25 billion pounds, 50 billion pounds or call a halt to it, while keeping key interest rates unchanged at a record low of 0.5 percent.
After the Fed's decision to reduce its planned purchases of agency debt, if the BoE expands its asset buying, it will likely put downward pressure on the pound, said Ayako Sera, market strategist at Sumitomo Trust & Banking.
But since views are divided and there is no explicit consensus formed in the market about what the BoE will decide on its asset purchase programme, the pound could be impacted either way, she said.
Sterling GBP=D4 slipped to $1.6522 ahead of the decision at 1200 GMT, from about $1.6558 in late U.S. trade.
Meanwhile, the Aussie AUD=D4 dipped to $0.9056 from about $0.9098 in late U.S. trade.
The Australian central bank earlier this week raised its cash rate by 25 basis points, but markets are uncertain if it will move again in December after unexpectedly weak retail sales data released on Wednesday helped temper rate hike expectations.
At 3.50 percent, Australian rates are the highest among major economies.