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CURRENCIES

Yen set for biggest drop in nearly 3 weeks

London

THE Japanese yen fell against the dollar and is poised to register its biggest daily loss in nearly three weeks on Tuesday after the central bank pledged to keep interest rates low and adopted a forward guidance model to strengthen its commitment for its massive policy stimulus.

The Bank of Japan's decision to keep settings at record low levels reassured market participants who were wary the Bank of Japan would signal an end to years of policy stimulus and encouraged investors to snap up relatively higher-yielding currencies such as the Australian dollar.

Some market watchers said Japan's reluctance to change its policy aggressively stems from its desire to keep its currency competitive, especially against the Chinese yuan, after Beijing let its currency weaken by more than 7 per cent versus the dollar since mid-June as trade war tensions escalated.

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The Japanese yen weakened 0.4 per cent to the day's low against the dollar at 111.595 and about 0.8 per cent above an intraday low of 110.75 hit in Asian trade.

Against the euro and sterling, the yen weakened 0.6 per cent each.

"China's push to keep its currency weak is also a big factor in Japan's decision today and that is driving the yen's weakness against its rivals," said Simon Derrick, chief currency strategist at BNY Mellon In London.

The BOJ pledged to maintain its short-term interest rate target at minus 0.1 per cent and decided to guide 10-year JGB yields around zero per cent.

Ahead of the BOJ decision, markets had speculated Tokyo may be preparing to roll back its massive stimulus policies prompting some speculators to cut back on their large short yen positions.

But the latest decision by the bank where policymakers also said the BOJ would allow long-term rates to fluctuate depending on economic and price developments, and conduct its bond purchases more flexibly, should encourage more bets.

"What the Bank of Japan has done today has signalled a cap on global bond yields and indicated the appetite for risk may have some more room to run," said Viraj Patel, an FX strategist at ING in London.

German and French government bond yields dropped three to four basis points after the Bank of Japan move and the euro hopped a fifth of a percent higher at US$1.17230.

Despite the yen's weakness, derivative markets painted a slightly more cautious picture. REUTERS