Markets: News  

Dollar up, yen slips as Fitch cuts Japan

NEW YORK (MarketWatch) -- The U.S. dollar rose to its highest level since January against a basket of major currencies Tuesday, bolstered by a drop in the Japanese yen after Fitch Ratings cut Japan's sovereign rating to A+ from AA.

The euro extended losses late in the session following comments from Greece's former prime minister that the economic impact from the Mediterranean nation leaving the euro zone would be very high, according to Dow Jones Newswires.

The dollar index (DXY) , which tracks the greenback against a basket of six major currencies, rose to 81.674, compared with 80.970 late Monday. It's reversing after two days of declines -- a short reprieve following a 14-day rally, its longest in decades. Read more on Monday's foreign-exchange market.

Against the yen, the dollar (USDJPY) rose to 79.96 yen from ¥79.30 Monday.

The euro (EURJPY) turned down against the yen, falling 0.3% at ¥101.38.

The Fitch ratings cut, announced after the close of Asian markets, comes a day ahead of the Bank of Japan's policy decision, though many analysts say the central bank won't ease further this week. Read about Fitch's downgrade.

The yen's decline is only partially attributable to the downgrade and the impact may be short-lived, according to Adam Cole, head of G-10 FX strategy at RBC Capital Markets. "With the [Japanese government bond] market almost wholly domestically owned, the ratings agencies are largely irrelevant for the Japanese yen," he wrote in a note.

On average, the dollar has rallied 0.5% on the yen in the wake of eight previous Japanese downgrades by ratings firms, only to give almost all of the gain back within a week, he said. "We expect no permanent damage from this downgrade either."

The dollar is also more attractive versus the yen as U.S. Treasury yields rose during the session, off near-record lows. Read about Treasury yields.

The U.S. dollar is "stronger today against most of the majors amid higher global equities and higher U.S. Treasury yields," said Eric Viloria, senior currency strategist at Forex.com.

EU Summit

As for the euro, it came under pressure against the dollar as investors lowered expectations of any coordinated action out of a European Union leaders' meeting on Wednesday. Key issues include Greece's possible exit from the euro zone, whether to issue jointly backed bonds and a potential regional deposit insurance to prevent bank runs stemming from rising fears over the region's banking sector.

"Whether German Chancellor Angela Merkel likes it or not, eurobonds and boosting the effectiveness of the [European Investment Bank] and deposit insurance for the region will be discussed," said Kathy Lien, director of currency research at GFT.

"Like the G-8 meeting, don't expect any policy decisions to be made at this informal event because the Germans and other euro-zone nations do not want to assume the risk of distressed nations without being able to control their bank regulation and public finances," she added. "Nonetheless, the world will be listening in closely for any hint of cooperation."

The euro (EURUSD) traded at $1.2688, falling from $1.2811 Monday. The shared currency hasn't closed under $1.27 since January.

The British pound (GBPUSD) also came under pressure, falling to $1.5754, compared with Monday's $1.5829.

The U.K. Office for National Statistics said annual consumer-price inflation slowed to a 3% pace in April from 3.5% in March. Economists had forecast a reading of 3%. Read more about U.K. inflation.

With annual inflation within a percentage point of the central bank's 2% target, Bank of England Gov. Mervyn King wasn't required to write an explanatory letter to Chancellor of the Exchequer George Osborne, as he has been lately.

The result puts inflation back on a downward path that was interrupted by a March spike, with the decline aided in part by the timing of Easter and its impact on airfares, noted Simon Smith, chief economist at FxPro in London.

Smith also said it's premature to assume the figures will help clear the way for an expansion of the Bank of England's quantitative-easing program, which means the pound's downside reaction to the data "could be viewed as a little overdone."

That said, currency markets "are all about positioning and short covering," he added, singling out the euro and the Australian dollar on this count.

Accordingly, "it's unwise to rationalize such moves on the back of data. We are, for the moment at least, in choppy waters on the [foreign-exchange] front," Smith wrote in a note.