Euro flat but may soon fall; dollar holds steady

LOS ANGELES (MarketWatch) — Major currencies stood their ground in early Wednesday trading, but with some analysts tipping upside for the Japanese yen and downside for the euro.

By midday in East Asia, the U.S. dollar had steadied after its Tuesday decline — which was fueled in part by a surge in the yen — to move sideways.

The two main dollar-tracking benchmarks were mixed, with the ICE dollar index DXY +0.03%  slipping marginally to 79.881 from late Tuesday’s 79.892, while the WSJ Dollar Index XX:BUXX +0.01% , which measures the greenback against a slightly larger basket of currencies, edged up to 70.74 from 70.73.

The yen extended its strength, with the dollar easing further against the Japanese unit after plunging almost 1% Tuesday amid disappointment over the Bank of Japan’s easing measures. 

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Furthering its loss, the dollar USDJPY -0.45%  fell to ¥88.44 from late Tuesday’s ¥88.74, while the euro EURJPY -0.64% similarly dropped to ¥117.74 from ¥118.10.

IG chief market strategist Chris Weston saw the yen’s gains — which came after Japan’s central bank adding to its asset-buying, but only with effect from next year — as a realization that Tokyo would not be loosening policy as much as hoped.

“The market now feels the actions are no way urgent enough to rise up to the task at hand. Clearly ... the aggressive policies that are sought by [Prime Minister] Shinzo Abe — and needed to even dream of achieving 2% inflation — are not going to materialize,” he wrote early Wednesday.

But analysts at Danske Bank said the yen’s gain in the face of the policy announcement may itself provoke tough action from the Japanese to push the currency back down.

If the yen rises further, “we are certain that we will see new measures from [the Bank of Japan] and the government,” they said in remarks quoted Wednesday by Dow Jones Newswires.

As a result, Danske Bank held to its outlook for further yen weakness ahead, though adding that “the pace will most likely slow now.”

The euro EURUSD -0.19% , which had seen little movement against the dollar Tuesday, was also flat Wednesday, trading at $1.3308 from $1.3311 late the previous day.

Still, Crédit Agricole said that the European currency could well suffer a “short, sharp correction of recent strength” after climbing almost 2% on a nominal effective exchange-rate basis since the start of the year.

Gains for the euro “may have moved ‘too far too soon,’ given a lack of fresh U.S. and European policy information in recent weeks,” they wrote Wednesday. “With little policy or economic data release triggers today, we look for a positioning-led short, but potentially sharp, correction towards $1.3100.”

Among other major forex rates, the British pound GBPUSD -0.12% bought $1.5830, little changed from Tuesday.

The sterling appeared to shrug off reports saying U.K. Prime Minister David Cameron planned to hold a national referendum on whether to stay in the European Union, if his government is returned to power in the 2015 elections. Read: U.K.’s Cameron to vow EU referendum if reelected.

The Australian dollar AUDUSD -0.16% , meanwhile, slipped 0.1% to $1.0537, according to FactSet, after below-forecast fourth-quarter inflation raised prospects for a further interest-rate cut.