US$ hits 6-week high against yen

New York

THE US dollar rose sharply on Friday, hitting a six-week high versus the yen, after the Bank of Japan took one of its main interest rates into negative territory and US gross domestic product data largely matched economists' expectations.

The BOJ said that it would apply a negative interest rate of minus 0.1 per cent on selected current account deposits that financial institutions hold with it, effectively charging banks interest for holding excess deposits at the central bank.

The bank said that it would cut interest rates further into negative territory if necessary.

The rate cut was the latest example of policy divergence between the United States and other world central banks, said Tony Bedikian, managing director of global markets at Citizens Bank in Boston.

The Federal Reserve raised US interest rates in December and signalled that it intended to tighten credit four times this year, while Japan joined the European Central Bank in cutting rates to below zero.

"That in and of itself is a dollar strengthening story," Mr Bedikian said.

"We had an outsized move because it was a little bit of a surprise with Japanese rates pulling into negative territory and capital drove into the US markets and into the dollar."

US GDP grew at a 0.7 per cent annual rate in the fourth quarter, after a 2 per cent growth in the third, but was near economists' revised predictions for economic growth.

"There's a little bit of support in today's number for the Fed raising rates," said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange in New York.

"And if there's support for the Fed raising rates that's obviously dollar positive."

Higher interest rates make currencies more attractive for investors because they provide better returns. The US dollar index, which tracks the US dollar against six major world currencies, rose 1.1 per cent to 99.586, its highest since Dec 3.

The greenback booked gains of more than one per cent against the euro, British pound, and Swiss franc after the GDP figures were released, moving the US dollar into positive territory on the month against each currency.

The US dollar rose 2.4 per cent against the yen after the release of the data, reaching its highest since Dec 18. It last traded up 1.9 per cent at 121.05.

Friday's move reversed the greenback's month-long slide against the yen. It rose 0.4 per cent against the yen for the month.

The Japanese currency was up more than 1.3 per cent in January prior to the BOJ's rate cut announcement Thursday night. REUTERS