(Updates to U.S. afternoon)
* Treasury told banks it may intervene in yen, source says
* Yen extends gains from prior session
* BOJ leaves rates unchanged at 1%, delivers hawkish signal
* Dollar index set for biggest weekly fall since January
By Saqib Iqbal Ahmed
NEW YORK, July 31 (Reuters) - The dollar fell against the
Japanese yen on Friday, with traders braced for a second round
of intervention after Japanese authorities stepped in to prop up
their currency a day earlier.
The dollar slipped 0.8% to 158.225 yen, a day after sinking
2.4%.
The U.S. Treasury has informed a number of banks that it may
intervene in the yen market on Friday and that they should
"stand ready for future action," a source familiar with the
matter told Reuters.
Japan was also receiving support from the U.S. that "goes beyond
psychological support", Japan's top foreign exchange diplomat
said on Friday.
Eric Theoret, FX strategist at Scotiabank, said it was
unclear if Friday's modest rise in the yen was a result of
actual intervention, or traders reacting to the possibility of
one in the near future.
"In thin liquidity, intervention can have a much greater
impact. Even the mere kind of possibility that this could happen
is definitely something that markets are going to respond to in
a very sensitive way," Theoret said.
Strategists at Goldman Sachs said they see intervention as
an effective tool for authorities to buy some time before
fundamental factors turn more positive.
"It seems likely that authorities would intervene further in
coming days if the yen begins to unwind (Thursday's) move, as
was the case in May of this year," the strategists said in a
note.
The Bank of Japan earlier in the day kept short-term
interest rates steady at 1% in a widely expected move.
The BOJ, which hiked rates to a 31-year high last month,
said for the first time that underlying inflation could exceed
its target, signaling further rate hikes from as soon as
September.
BOJ Governor Kazuo Ueda said many of the board members'
inflation forecasts are fairly high, and they see risks skewed
to the upside.
"We'd characterize that as a hawkish hold, in the sense that
they're very much open to tightening rates, I think, at the next
meeting in September," Scotiabank's Theoret said.
Japan's slow pace of rate hikes has been blamed for pushing the
yen to 40-year lows below 163 per dollar recently. Most analysts
polled by Reuters expect the BOJ to raise rates again to 1.25%
by year-end.
Thursday's moves resulted in spot yen trading volumes surging to
their highest in 10 years on the EBS trading platform and
futures trading volumes hitting their highest on record, the CME
Group said.
In a rare coordinated move, South Korea also conducted
dollar-selling intervention on Thursday to support its currency,
a market source told Reuters.
The won, which rose to a nine-month high on Thursday,
was down about 1% at 1,439.66 against the dollar.
WAVE OF INTEREST-RATE DECISIONS
The BOJ meeting followed the U.S. Federal Reserve's decision on
Wednesday to leave interest rates unchanged, which bruised the
dollar as traders questioned whether the Fed's new chair is
serious about containing inflation.
That has added to the dollar's pain with the greenback down
1.6% for the week, on pace for its biggest weekly fall since
late January, against a basket of peers.
On Friday, it was down 0.26% at 99.807.
In Europe, the euro inched up 0.1% to $1.1535.
Sterling rose 0.2% against the dollar.
The Bank of England also kept its main lending rate steady in a
widely expected decision on Thursday.
In cryptocurrencies, bitcoin slipped 2% to $63,207.