NEW YORK: The dollar plummeted from a four-year peak against the yen on Friday after dismal data on US retail sales last month reinforced expectations the Federal Reserve will continue buying bonds to support the US economy.
The yen's bounce, however, should prove to be temporary given the Bank of Japan's aggressive monetary easing to fight decades-long deflation. Most market experts contend it's only a matter of time before the dollar rises above the 100-yen mark, a key psychological and technical level.
The dollar succumbed to selling pressure after data showed US retail sales fell 0.4 percent in March, contracting for the second time in three months in a sign the American economy may have stumbled at the end of the first quarter.
"It is the latest in a growing list of economic numbers that will likely keep the dollar pressured and the Fed in no hurry to normalize policy," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.
Separate data on Friday showed US consumer sentiment tumbled in April.
The Fed's bond-buying program is tantamount to printing money and dilutes the value of the dollar. Minutes from recent Fed meetings suggested some policymakers expected to taper the pace of asset purchases sometime this year.
Nevertheless, those meetings occurred before the release of March jobs data earlier this month, which showed tepid gains in payrolls. The Fed has said it will continue buying bonds until the labor market shows substantial improvement.
The dollar last traded at 98.98 yen, down 0.7 percent and far below the session high of 99.80 yen, according to Reuters data. The dollar reached a high of 99.94 on Thursday, the strongest since April 2009.
On the week, the dollar was up about 0.8 percent against the yen, its second straight week of gains. It was on track for its largest two-week gain versus the yen since early 2009.
The dollar had gained about 6 percent against the yen since the BoJ last week pledged to inject about $1.4 trillion into the Japanese economy in less than two years. But the rally has slowed near the psychologically important 100 level, with traders citing hefty option barriers and dollar selling pressure from Japanese exporters.
"There is a correction taking place in the wider yen selloff that we have seen," said Chris Walker, currency strategist at Barclays. "But drops in the dollar/yen have been shallow and are good levels to short the yen. We forecast dollar/yen to rise to 103 yen in a month's time."
The BoJ's steps have prompted many analysts to revise up their forecasts for the dollar's strength against the yen. Societe Generale analysts now target an eventual rise to 110, up from 103 previously, while Bank of Tokyo Mitsubishi UFJ forecasts dollar/yen at 109 in the next 12 months.
The euro last traded at 129.54 yen, down 0.8 percent and far below 131.11 yen set on Thursday, which marked its highest in more than three years.
CAPITAL FLOWS
On Friday BoJ Governor Haruhiko Kuroda said he had taken all necessary steps to meet the central bank's 2 percent inflation target in two years and will try to minimize volatility in the Japanese government bond (JGB) market caused by the massive bond buying program.
Fund managers and analysts say that once the volatility in the bond market settles, Japanese investors are likely to reallocate money overseas in search of higher yields.
"With the BoJ now a major buyer of JGBs, expectations are that Japanese investors in JGB's -- mainly banks, insurance companies and pension funds -- will start to allocate part of their money to foreign assets," said Jaco Rouw, fund manager at ING Investment Management.
"This might partly be on an unhedged basis if the BoJ successfully creates expectations of a weaker yen. As almost all yen weakness so far has been driven by the international financial community, this Japanese flow should be the next leg of further yen depreciation."
The data shows no such flow yet, but analysts expect that may change quickly.
Against the dollar, the euro was at $1.3086, down 0.1 percent, weighed by concerns about Cyprus. Reported option expiries around $1.3000 could likely keep the currency pinned around that level.
Cyprus said its financing needs under its international bailout have risen to around 23 billion euros, from 17.5 billion euros originally.
<Center><b><i>Copyright Reuters, 2013</b></i><br></center>
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