New York (AFP) - The yen soared to a four-month high against the dollar Tuesday after a surprise monetary policy tweak by the Bank of Japan, which decided against hiking interest rates to tame decades-high inflation.
The yen's jump weighed heavily on share prices of Japanese exporters, as the currency also rallied against the euro.
"The shift in (Bank of Japan) policy was slight," noted Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
"The decision is being read as a sign of testing the water, for a potential withdrawal of the stimulus which has been pumped into the economy."
The Bank of Japan (BoJ) adjusted its parameters for controlling bond yields, in a shift away from its long-running dovish stance of keeping rates ultra-low to boost the struggling economy.
Inflation in Japan has risen sharply this year, with the consumer price index in October at 3.6 percent.
This marks the highest reading in four decades, although bank boss Haruhiko Kuroda and other officials have said that would be temporary, citing a lack of strong demand and wage rises.
The BoJ move sent the yen to 131.01 per dollar, its strongest level since August.
Japan's unit has been hobbled this year by its central bank's determination to stick to a loose monetary policy -- hitting a 32-year low of around 150 to the dollar in October -- even as the Fed ramped up borrowing costs.
Tuesday's policy move "was bound to happen with inflation rising in Japan, it's just happened sooner than many thought," said Amir Anvarzadeh of Asymmetric Advisors.
"It could spark money flowing back into Japan."
Elsewhere in Asia, stock markets fell following a spike in Covid infections in China as officials roll back many of the strict containment measures in place for almost three years.
The World Bank on Tuesday slashed its China growth forecast for the year as well, as the pandemic and property sector weaknesses hit the world's second-largest economy.
In the United States, key indices closed just slightly higher as investors tried to shake off uncertainty and fears of a downturn.
The Nasdaq Composite Index ended flat while the S&P 500 edged up 0.1 percent.But the Dow Jones Industrial Average picked up 0.3 percent after a four-day slump.
A so-called Santa rally appears to be eluding investors, with the mood dampened by last week's warnings from the Federal Reserve and European Central Bank that they would likely push interest rates higher than expected next year.
The remarks dealt a blow to a short rally across equities that had been fueled by data showing inflation coming down.
"Those who were in the camp of a year-end rally are now second-guessing their investment thesis," said JC O'Hara of MKM Partners.
Adding to the selling pressure were comments from former New York Fed chief William Dudley, who told Bloomberg Television that any sign of optimism in markets could make monetary policymakers tighten even more.
Downbeat US housing data added to the gloom with building permits, a leading indicator for the key economic sector, plunging.
"That speaks to the waning confidence among homebuilders who recognize the affordability constraints for prospective buyers due to building cost inflation and much higher mortgage rates," said market analyst Patrick O'Hare at Briefing.com.
In Europe, London ended the day higher, while Frankfurt and Paris slid lower.
Key figures around 2150 GMT
New York - Dow: UP 0.3 percent at 32,849.74 (close)
New York - S&P 500: UP 0.1 percent at 3,821.62 (close)
New York - Nasdaq: FLAT at 10,547.11 (close)
EURO STOXX 50: DOWN 0.2 percent at 3,802.49 (close)
London - FTSE 100: UP 0.1 percent at 7,370.62 (close)
Frankfurt - DAX: DOWN 0.4 percent at 13,884.66 (close)
Paris - CAC 40: DOWN 0.4 percent at 6,450.43 (close)
Tokyo - Nikkei 225: DOWN 2.5 percent at 26,568.03 (close)
Hong Kong - Hang Seng Index: DOWN 1.3 percent at 19,094.80 (close)
Shanghai - Composite: DOWN 1.1 percent at 3,073.77 (close)
Dollar/yen: DOWN at 131.69 yen from 136.95 yen on Monday
Euro/dollar: UP at $1.0632 from $1.0610
Pound/dollar: UP at $1.2186 from $1.2148
Euro/pound: DOWN at 87.21 pence from 87.31 pence
Brent North Sea crude: UP 0.2 percent at $79.99 per barrel
West Texas Intermediate: UP 1.2 percent at $76.09 per barrel
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