NEW YORK: The yen fell to a multi-month low against the dollar on Tuesday after the Bank of Japan boosted its asset-buying program, though analysts cautioned that the yen's slide could be braked as the effect of the monetary easing fades.
The euro also fell after Moody's downgraded six European countries and warned it may cut three others' ratings.
The dollar traded as high as 78.46 yen, surging more than 1 percent to its strongest since Nov. 1, according to data from Reuters and EBS.
The dollar subsequently traded at 78.43 yen, tracking its biggest one-day gain since Oct. 31, when Japan unilaterally intervened in foreign exchange markets to weaken the currency.
The euro also climbed against the yen, reaching as high as 103.18 yen before leveling off at 103.07 yen.
The BOJ surprised markets by boosting its asset-buying and lending scheme by 10 trillion yen to 65 trillion yen, to try to bolster Japan's economy. The entire increase is to be used to purchase long-term Japanese government bonds.
The easing "played up concerns about the outlook for the Japanese economy. That could keep door open for further easing down the road," said Joe Manimbo, senior market analyst with Travelex Global Payments in Washington, D.C.
"I think for the time being the Japanese yen is pushed to the back burner as a (safe-)haven asset, given fresh concerns about the health of the Japanese economy," he added.
A rally in global stock markets this year has been accompanied by a decline in the yen versus the euro and the US dollar as investors have sought riskier investments. The low-yielding yen tends to underperform when risk sentiment improves as investors use it as a funding currency to buy higher-yielding assets.
The dollar on Tuesday jumped above its 200-day moving average at 78.05 yen for the first time mid-April, and a daily close above there for the first time since 2011 would be a clear positive sign. Support for the dollar was back at the top of the daily Ichimoku cloud around 77.43.
Still, analysts said, the dollar could rise much higher.
"We think dollar/yen will struggle to get through the 80 yen area, which has capped recent moves higher," said Lauren Rosborough, senior currency strategist at Societe Generale.
"Although the BoJ has announced another expansion, when put into context it is catching up with easing measures taken in the US," she added.
EURO, STERLING FALL
The euro fell against the dollar and sterling fell to a two-week low against the greenback after ratings agency Moody's warned it may cut the ratings of France, Britain and Austria and downgraded six other European nations.
The euro fell 0.49 percent to $1.3129, as sterling dropped 0.63 percent to $1.5666.
Sterling had been supported by a sense that the UK's credit rating was safe, said Ray Attrill, head of FX strategy for North America at BNP Paribas in New York.
"That's now been challenged," he added. "I think some people will be questioning their appetite for gilts."
Moody's move follows action by Standard & Poor's last month, when France and Austria lost their triple-A status while Italy, Spain, Portugal, Cyprus, Malta, Slovakia and Slovenia were downgraded.
The European Union has given Greece until Wednesday, when euro zone finance ministers are expected to meet to specify how 325 million euros of the 3.3 billion euros demanded in budget savings as a condition of Athens receiving a second rescue package will be achieved.
By the same deadline, Greek political leaders must give a written commitment to implement the terms of the rescue deal.
"The market is dominated by Wednesday's Eurogroup meeting and there is still huge tail risk for the euro," Societe Generale's Rosborough said.
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