[NEW YORK] The US dollar on Wednesday dropped to a two-week low against the yen after Japan delayed a sales tax increase for longer than expected, raising concerns about the lack of Japanese monetary stimulus to halt the yen's rise.
Japanese Prime Minister Shinzo Abe announced a two and a half-year delay in a sales tax increase, putting plans for fiscal reform on the back burner amid weakness in the economy.
Some analysts said the delay raised concerns that Japan may be less likely to engage in more monetary stimulus. Other analysts said the length of the delay highlighted Japanese officials' concerns about their country's economy.
"It highlights once again the lack of economic progress," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. He said the US dollar's weakness against the yen was partly on safe-haven bids for the Japanese currency.
The US dollar sank by as much as 1.5 per cent against the yen to a two-week low of 109.06 yen, continuing to ease from a one-month high of 111.43 yen touched on Monday. The euro was last up 0.49 per cent against the US dollar at US$1.1184.
The US dollar briefly pared declines against the euro, yen and Swiss franc after the Institute for Supply Management said its index of US factory activity came in at 51.3 for May. That beat expectations for a drop to 50.4, according to a Reuters poll of economists.
Commerce Department data showed US construction spending, however, fell 1.8 per cent in April, the most in more than five years, as outlays fell broadly, which could prompt economists to lower their second-quarter growth estimates.
Expectations of a June interest rate increase by the Federal Reserve rose after the ISM data. Fed funds futures suggested traders last saw a 24 per cent chance the US central bank would raise rates at its June meeting, up from 17 per cent before the ISM reading, according to data from CME Group's FedWatch program.
Analysts said doubts lingered about the likelihood of a June rate increase. Some analysts have cited recent soft US economic data.
"The expectations for a June rate hike are still pretty low in the market," said Brian Daingerfield, currency strategist for RBS Securities in Stamford, Connecticut.
The US dollar index, which measures the greenback against a basket of six major rivals, was last down 0.5 per cent at 95.408.