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Yen fall continues on BoJ policy expectations
November 18, 2012
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NEW YORK: The yen fell for a third straight day against the dollar on Friday, on track for its worst weekly loss since mid-February as expectations of aggressive monetary easing from the Bank of Japan continued to curb the currency’s appeal.

The dollar, up about 2.3 per cent versus the yen on the week, remained in favor after Japanese Prime Minister Yoshihiko Noda paved the way for a snap election December 16. The lower house of parliament was dissolved on Friday.

Shinzo Abe, leader of the main opposition Liberal Democratic Party and seen as likely to be Japan’s next leader, called on Thursday for the country’s central bank to adopt interest rates of zero or below to spur lending.

The euro, meanwhile, continued its downward drift as concerns over Greece’s debt struggle and Europe’s stagnant economy weighed.

The dollar rose as high as 81.38 yen. It last traded at 81.36, up 0.3 per cent on the day, according to Reuters data, with traders citing a large options barrier at 81.50 yen and stop-loss orders placed above it. The US currency hit a 6-1/2-month high of 81.45 yen on Thursday, according to Reuters data.

Some analysts believe it could rise toward 82 yen if the Bank of Japan, which holds a policy meeting next week, indicates it could ease further.

Price action, however, was subdued compared with on Wednesday and on Thursday when the dollar rallied about 1.1 per cent each day.

 “We have had quite a big move in the last couple of days so we’ve probably seen a bulk of the early moves. The direction will continue trending higher in coming months,” said Colin Asher, senior economist at Mizuho Corporate Bank.

 “Some investors with short-term horizons are probably looking to take profits after such big moves and some of the longer-term investors are happy to sit on their positions on the expectations that the rise will continue.”

The yen, seen as a safe haven in times of uncertainty, could pare losses should concerns about the US “fiscal cliff” mount and euro zone debt concerns deepen. But the dollar should also benefit due to its safe-haven status.

The dollar/yen pair traditionally has a strong correlation with the spread between two-year US Treasuries and Japanese government bond yields.

Short-dated Japanese bond yields have fallen sharply this week but so have US Treasury yields on expectations of Federal Reserve easing and safe-haven flows into Treasuries due to worries about the US budget impasse.

If Congress and the White House cannot reach a debt and deficit reduction deal by the end of the year it will unleash massive spending cuts and tax increases that some believe have the potential to tip the US economy back into recession.

A protracted impasse in US talks to avoid some of the $600 billion of spending cuts and tax hikes that kick in early in the new year could prompt some investors to seek shelter in the dollar.

Congressional leaders said their meeting with President Obama on Friday about the “fiscal cliff” was constructive.

EURO

Against the dollar, the euro fell for the first time in three sessions, last trading down 0.6 per cent at $1.2708 but holding above on Tuesday’s two-month low of $1.2660.

At current prices the euro is flat on the week, but down 1.9 per cent so far in November.

A dispute among Greece’s international lenders and weak economic data out of the euro zone have done little to lift market sentiment toward the euro.

Any new reduction of Greece’s debt should only come as a reward for Athens implementing the reforms it has signed up to, European Central Bank Governing Council member Jens Weidmann said on Friday.

Weidmann’s fellow Governing Council member, Luc Coene, on Thursday became the first ECB policymaker to say that another haircut on part of Greece’s debt was probable.

Reuters
 

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