BLBG: Yen Advances to Three-Week High as Yield Difference Narrows
The yen rose to a three-week high versus the dollar, after gaining the most since December yesterday, as speculation the U.S. and Europe are committed to keeping down yields boosted the appeal of Japanese assets. Gold posted the biggest jump in more than four months.
The yen advanced the most in two weeks versus the euro on bets the European Central Bank will keep cutting interest rates as the region’s recession deepens. The euro gained against the dollar as the Federal Reserve unexpectedly said yesterday it will purchase $300 billion of Treasuries to keep funding costs down.
“Dollar-yen is highly correlated with U.S. bond yields,” said Hans-Guenter Redeker, the London-based global head of foreign-exchange strategy at BNP Paribas SA. “Now that the Fed is taking control of the bond market, it means yields are going to move lower and dollar-yen will decrease.”
The yen rose 0.7 percent to 95.58 per dollar as of 7:08 a.m. in New York. It earlier reached 95.27, the strongest level since Feb. 24. The euro fell 0.5 percent to 129.03 yen. Europe’s single currency traded at $1.3502, from $1.3474 yesterday, when it surged the most in nine years against the greenback.
The ICE’s Dollar Index slid for an eighth day, the longest run of declines in a year, as the Fed’s Open Market Committee also said it would purchase an additional $750 billion of agency mortgage-backed securities, as it seeks to add funds to the financial system to boost lending.
‘Strong Move’
Chairman Ben S. Bernanke may signal the Fed’s intention to take other steps to lower borrowing costs when he speaks in Phoenix, Arizona, tomorrow.
“This is a surprisingly strong move by the Fed to inject massive amounts of money into the system,” said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital, the world’s third-largest foreign-exchange trader. “It is likely to diminish the appeal of the dollar as a safe haven and lead to further weakness.”
The yen gained against 13 of the 16 most actively traded currencies on speculation countries around the world will keep cutting interest rates, reducing the yield advantage over Japanese borrowing costs.
Foreign investors bought 58.2 billion yen ($609 million) in Japanese bonds during the week ended March 14, according to figures based on reports from designated major investors released by the Ministry of Finance in Tokyo.
Fed’s Decision
The Fed yesterday kept the interest rate at between zero and 0.25 percent, while the Bank of Japan left its main rate at 0.1 percent. The Bank of England this month lowered its benchmark rate to 0.5 percent and the European Central Bank cut its benchmark rate to 1.5 percent.
The Fed’s decision to buy Treasuries reduced the extra yield of U.S. debt over Japanese bonds near to the least in about two months. The difference in yields between 10-year U.S. Treasuries and Japanese debt was at 1.27 percentage points, or near the lowest since Jan. 20, according to data compiled by Bloomberg.
“Compared to the BOE and the Fed, the BOJ policy stance is rather moderate as they are reluctant to go back to quantitative easing,” said Satoru Ogasawara, a foreign-exchange analyst and economist in Tokyo at Credit Suisse Group AG, the second-largest Swiss bank. “The market has started to see that the magnitude of the Fed’s policies is much larger and is applying downward pressure on the dollar. The yen will strengthen toward 90 within in a month,” he said.
Gold climbed 5.2 percent to $935.50 an ounce in New York. Before the Fed’s announcement, gold fell 3 percent, the biggest decline based on closing prices since Jan. 12.
Dollar Index
The Dollar Index, which tracks the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, declined to 84.052, from 84.595 yesterday. The gauge has fallen about 5.9 percent since reaching 89.62 on March 4, the highest level since April 2006.
European Central Bank governing council member Guy Quaden said policy makers may cut the benchmark interest rate further from the current record low.
“Unlike other central banks we have not completely exhausted our margin for maneuver on interest rates,” Quaden said in an interview with Belgium’s Trend-Tendances magazine. “I will not fix any limit.”
Investors maintained bets the ECB will reduce borrowing costs at its next policy meeting on April 2. The yield on the three-month Euribor interest-rate futures contract due June was at 1.34 percent from 1.47 percent a week ago, according to data compiled by Bloomberg.
“The clear winner in this environment is the euro,” said James McCormick, Citigroup Inc.’s London-based global head of currencies. “Given that they’ve been focused on domestic issues and that they’ve been very clear at that the moment they don’t see what the Fed has done as an option, I don’t see a de facto change in European Central Bank policy.”
European industrial production dropped 15.5 percent in January from a year earlier, after falling 12 percent in December, according to a Bloomberg News survey of economists before tomorrow’s report.
“There are ongoing expectations for lower rates in the euro zone,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “This is likely to weigh on the euro,” which may decline to $1.34 today, he said.
