LONDON: The dollar rose around a third of a percent against the yen as markets listened to the Bank of Japan's latest comments on policy on Friday while sterling soared on a surprise hint from the Bank of England that interest rates could rise this year.
The big action overnight was all on the pound. BoE Governor Mark Carney sent money market rates spinning higher by telling London's financial community at Thursday's annual Mansion House dinner that rates may rise sooner than markets currently expect.
That sent sterling to a 19-month high against the euro and close to key resistance around $1.70, up around 1 percent since the close of play in London on Thursday.
"For us, this was a clear signal that the first hike will come this year," said Lee Hardman, a strategist with Bank of Tokyo Mitsubishi-UTJ in London.
"We think the first month for the bank to move will be November." The move was all the more shocking given how little faith the market has shown in the pound's ability to rise further against the dollar after a 10 percent rise in the past year.
The currency has baulked so far this year at any attempt to breach $1.70 and sellers quickly appeared around $1.6980.
By midday in Europe, sterling had gained another 0.2 percent compared to prices late on Thursday in the US session. Most analysts and traders have continued to back sterling against the euro, which was worth less than 80 pence for the first time since November 2012.
YEN DIP
Both the yen and the dollar looked supported going into the weekend given concerns over a conflict in Iraq that has prodded oil prices higher this week.
Slightly firmer US bond yields helped the dollar recover from two-week lows against the yen.
The Bank of Japan's decision to hold monetary policy steady underpinned the Japanese currency, though the outcome was widely expected and factored into positions.
There was little price movement around Governor Haruhiko Kuroda's remarks at a news conference afterwards and traders said the yen looked pinned in between 101.70 and 102.20 yen per dollar.
"Deeply negative real rates in Japan will force savers to look offshore for better returns," said Kit Juckes, an analyst with Societe Generale in London. "But while that leaves me thinking the yen will weaken further in due course, we could be in low-volatility range trading for a very long time."
The dollar added 0.25 percent on the day to buy 101.96 yen, after dropping as low as 101.60 yen on Thursday. The euro rose by just over 0.3 percent to 138.31 yen.
Against the dollar, the euro was a touch higher at $1.3568, having again resisted a push toward a four-month low of $1.3503 set last week after the European Central Bank unveiled a package of monetary easing, becoming the first major central bank to charge financial institutions for parking their funds with it.
The jury remains firmly out on whether there is much more near-term weakness to come for the single currency, propped up by flows of capital into higher-yielding southern euro zone bond markets, Germany's huge trade surplus and a reordering of Asian central banks' reserves in favour of the euro.
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