BLBG: Yen Weakens to 12-Week Low Against Dollar as Refuge Role Wanes
The yen fell to a 12-week low against the dollar as the deterioration in Japan’s economy eroded the currency’s allure for investors fleeing the financial crisis in the U.S. and Europe.
Japan’s currency also dropped to the weakest level in a month versus the euro after Prime Minister Taro Aso’s approval rating slumped, according to a survey published today by Sankei newspaper, and economists forecast a report this week will show the trade deficit widened to the largest in 23 years. The dollar declined versus the euro on speculation a U.S. report today will show home prices fell at the fastest pace on record in December.
“We are going to see the yen continue to weaken regardless of what stocks do,” said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA. “We have quite a lot of negative news coming from Japan.” The yen will trade between 97.5 and 98 per dollar “in the next few days,” Stannard said.
Japan’s currency weakened to 95.65 per dollar as of 11:03 a.m. in London from 94.61 yesterday in New York. It traded as low as 95.69, the lowest level since Nov. 28. It depreciated to 122.67 per euro, after trading at 122.73, the lowest level since Jan. 9, from 120.10 yesterday. The dollar traded at $1.2820 per euro, from $1.2694 yesterday.
Japan’s trade deficit widened to 1.2 trillion yen in January, the Finance Ministry will say tomorrow, according to a Bloomberg News survey. Core consumer prices probably fell for the first time in more than a year in January, economists in a separate survey predict a government report will show Feb. 27.
Decline Versus Dollar
The yen fell 6.5 percent against the dollar since trading at a 13-year high on Jan. 21 even as the Standard & Poor’s 500 Index lost almost 12 percent. Its decline today against the euro was the fifth in as many days, the longest stretch since September.
The MSCI World Index fell 0.5 percent today, its 11th straight decline, as every major stock market in Europe dropped. Futures on the S&P 500 Index gained 1 percent.
“The yen appears to be losing some of its safe-haven status,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Japan’s economic and political situation is poor.”
Prime Minister’s Aso’s approval rating fell 6.8 percentage points from last month to 11.4 percent, while his disapproval rating rose 8.8 points to 80.2 percent, the Sankei survey, conducted with Fuji News Network, showed. The governing Liberal Democratic Party has the support of 21.9 percent, compared with 25.9 percent for the opposition Democratic Party of Japan.
Broken Correlation
The correlation between the dollar-yen and the Nikkei-225 Stock Average was minus 0.89 since Feb. 16, when a report showed Japan’s economy shrank at an annual 12.7 percent pace in the last quarter, the most since the 1974 oil shock. The relationship was positive 0.86 in the 12 months to Feb. 16. A reading of 1 would mean the two moved in lockstep.
“The correlation has broken down, because the drivers are now changing,” Stannard said. “Dollar-yen in particular will continue to move quite sharply higher.”
The relationship between stocks and the yen has been in place since the beginning of 2005 when the so-called carry trade was established, said Derek Halpenny, European head of global currency research at Bank of Tokyo Mitsubishi Ltd in London.
“From recent price action I think it’s a fairly good bet that the carry has been unwound and that will certainly weaken the risk-yen correlation,” Halpenny said.
Credit-Default Swaps
In the carry trade, investors buy higher-yielding currencies with lower-yielding ones, such as the yen. The yen gained 30 percent against the dollar since from its low on June 22, 2007, to its high on Dec. 17, 2008, as the trade all but evaporated.
Traders are starting to use credit-default swaps, the speculative contracts blamed for fueling Wall Street’s meltdown last year, to measure currency strength as countries increase debt sales to kickstart their economies. Interest rates are becoming less useful for predicting foreign exchange as central banks cut borrowing costs to near zero, narrowing differences between government debt yields.
The cost of protecting Japanese bonds for five years rose to a record 122 basis points Feb. 17, compared with an average of 23 basis points last year. The contracts fell eight basis points to 96 basis points today, according to data compiled by Bloomberg.
The dollar declined against the euro and the pound amid concern reports may show the U.S. economic slump is deepening. The S&P/Case-Schiller index of house prices in 20 U.S. cities declined 18.3 percent in December from a year earlier, according to a Bloomberg News survey of economists, the most since year-on- year records began in 2001. The report is scheduled for release at 9 a.m. in Washington.
‘Unabated Decline’
“U.S. economic data due this week may underscore the unabated decline of the housing market, which should bode ill for the dollar,” said Shinya Furue, an economist in Tokyo at Norinchukin Research Institute Ltd. “If the housing data are weak enough, the dollar may fall to between 90 yen and 92 yen.”
The dollar weakened to $1.4538 against the British pound, from $1.4487, and to 1.1557 Swiss francs, from 1.1686.
The ICE’s Dollar Index, which tracks the greenback against six major trading partners including the euro and the yen, dropped 0.4 percent to 86.860. It reached 88.254 on Feb. 18, the highest level since Nov. 21.
Federal Reserve Chairman Ben S. Bernanke is scheduled to deliver his semi-annual monetary policy report before the Senate Banking Committee today and the House Financial Services Committee tomorrow.
Euro Versus Dollar
The euro stayed higher versus the dollar and the yen even after a German report showed business confidence declined in February, backing the case for the European Central Bank to lower interest rates. The Ifo Institute report said the business climate index, based on a survey of 7,000 executives, dropped to 82.6 this month, from 83 in January.
“Given mounting economic challenges in the eurozone and neighboring countries, the ECB is unlikely to be able to signal an end to the rate-cutting cycle,” said Yousuke Hosokawa, a senior foreign-exchange dealer at Chuo Mitsui Trust and Banking Co. in Tokyo. “This may potentially be a euro negative.”
Ukraine’s hryvnia weakened below its lowest close on record of 9.1 per dollar after Moody’s Investors Service said it may cut the nation’s credit rating because political disputes are hurting policy makers’ attempts to address the economic crisis.
The ratings company placed Ukraine’s government local and foreign-currency bond ranking of B1, four levels below investment grade, on review for downgrade, following Standard & Poor’s move last week, Washington-based Moody’s said today.
