The yen lost ground across the board this week amid the fallout from the Bank of Japan's decision to keep interest rates on hold at 0.25 per cent on Thursday.

Analysts said the decision fuelled investor appetite for carry trades, in which investors fund positions in high-yielding currencies by selling low-yielding currencies such as the yen.

The yen fell to its lowest level since March 2003 against the dollar; a nine-year trough against sterling and came close to an all-time low against the euro.

At the start of the week, markets had been pricing in a 25 basis point interest rate rise amid reports that Toshihiko Fukui, BoJ governor, was working to ensure a majority of the central bank's policy board backed a decision to tighten Japanese monetary policy.

Those expectations turned round on Tuesday as well-sourced reports in the Japanese media suggested that the BoJ would continue monitoring economic data before deciding whether to raise interest rates. There were suggestions that the central bank had bowed to political pressure in leaving interest rates unchanged, leading some analyststo question the bank'sindependence. Statements from Japanese government and BoJ officials did little to assuage the sceptics.

"The number of comments and assurances from anyone and everyone trying to convince the market that the BoJ did not bow to pressure from the government and made the decision entirely independently makes me even more convinced that is exactly what they did," said Richard Wiltshire at IG,Markets.

Over the week, the yenfell 0.9 per cent to Y121.40 against the dollar; 1.7 per cent to Y239.50 against sterling and 1.1 per cent to Y157.10 against the euro.

The dollar was little changed against the euro, easing just 0.2 per cent to $1.2940 over the week, in spite of a flurry of robust US economic data.

Both US housing starts and inflation data came in stronger than expected. But analysts said the figures had not significantly changed US interest rate expectations.

"As long as we don't see a dramatic shift in rate expectations for both the Federal Reserve and the European Central Bank, uncertainty and market positioning will dominate and will limit the chances of a break out of the $1.2850 to $1.3080 range," said Gavin Friend, strategist at Commerzbank.

Sterling advanced as figures revealed UK consumer price index inflation rose to 3 per cent in December, the fastest pace since the data was introduced in 1997 and well above the Bank of England's 2 per cent target rate.

The rise had been expected after the bank's surprise decision this month to raise interest rates. Analysts said other robust UK data this week, including yesterday's forecast-beating retail sales figures, had led expectations for further UK monetary tightening to increase.

The pound rose 0.7 per cent to $1.9740 against the dollar over the week and0.7 per cent to a two-and-a-half-year high of £0.6555 against the euro.

Source:  Financial Times