FOREX-Yen trims gains as doubts creep in over BOJ easing

By Jemima Kelly
Reuters

* Yen recovers from one-week lows

* BOJ plans negative rates at core of future easing -sources

* Dollar index edges down a week before Fed decision

LONDON, Sept 14 (Reuters) - The yen recovered from one-week lows against the dollar and euro on Wednesday, as investors doubted that reports the Bank of Japan was considering further monetary easing measures would turn into a source of significant weakness for the yen.

Sources familiar with the BOJ's thinking said the central bank would consider making negative interest rates the centerpiece of future easing by shifting its prime policy target to interest rates from base money.

But when the BOJ shocked markets in January by cutting rates below zero for the first time in an attempt to weaken the currency, the yen reaction was only temporarily - and since then it has gained almost 20 percent.

"We do expect them (the BOJ) to tweak policy next week, so we do look for a small deposit rate cut and maybe some further support for bank lending - some technical tweaks - but ultimately, is that going to be enough to sustainably weaken the yen?" said HSBC currency strategist Dominic Bunning, in London.

"We would argue no. The big bazookas have been used and then yen already looks in slightly undervalued territory so it's very hard to generate this significant yen weakness."

HSBC sees fair value for the dollar at between 93 and 99 yen, and expects the dollar to trade at 95 yen by year-end.

The dollar gained as much as 0.7 percent after the initial reports on further BOJ easing, hitting 103.35 yen, its strongest since September 6. But by 1050 GMT it had fallen back to 102.66 yen, leaving it flat on the day.

The euro initially gained 0.9 percent to hit a nine-day high of 116.085 yen before also falling back to 115.25 yen, up just 0.2 percent on the day.

Societe Generale macro strategist Kit Juckes said the BOJ would be able to weaken the yen.

"If they (the BOJ) come out more committed now, particularly into a rising U.S. yield environment, I think they can make a weaker yen stick," he said. U.S. long-term yields have risen in the past month, hitting a three-month high on Tuesday.

The greenback edged down against a basket of major currencies, having hit a one-week high the previous day. The U.S. Federal Reserve's next policy meeting begins in a week, with markets pricing in just a 15 percent chance of an interest rate hike this month, according to CME FedWatch.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Additional reporting by Shinichi Saoshiro in Tokyo; editing by John Stonestreet)

09/14/2016 7:18