Japanese yen losing its luster, some strategists say
The dollar was slightly higher against most major currencies Wednesday, buoyed by ongoing worries about Eastern Europe and shaky sentiment in global financial markets.
Shares on Wall Street continued to fall in morning trade, even after the Obama administration unveiled details of a plan to help 9 million "at risk" homeowners modify their mortgages, committing $75 billion of taxpayer money to back the initiative. See full story.
The dollar remained firm even after a report showed housing starts plunged 16.8% in January, much worse than expected. See report on housing starts. And Industrial production slumped 1.8% in January, although this was roughly in line with forecasts. See full story.
The greenback saw some profit-taking in early action "but probably remains one of the safest plays in the currency world as participants clear out of emerging markets," wrote strategists at Lloyds TSB.
The dollar posted a strong rally Tuesday as equity markets plunged and U.S. stock indexes tested key support levels.
Worries about European banks' exposure to Eastern Europe put pressure on the euro and details of restructuring plans by automakers General Motors and Chrysler ensured further safe-haven flows into the greenback, strategists said.
The U.S. dollar index , a measure of the greenback against a trade-weighted basket of currencies, rose to 88.171, up from 87.570 in late North American trade Tuesday.
U.S. equity market weakness should continue to encourage more dollar buying at current levels, though.
The dollar continued to outperform the Japanese yen. The dollar fetched 93.56, up from 92.37 yen Tuesday.
The Japanese currency had previously been the ultimate beneficiary of safe-haven flows, outpacing the dollar to the upside during times of rising economic turmoil.
But some strategists say that phenomenon, which had weakened in recent weeks, has virtually run its course.
Standard Chartered Bank on Wednesday lowered its short-term rating on the Japanese yen to neutral from overweight, while maintaining its medium-term underweight rating.
"The Japanese yen has rallied across the board since September on the back of de-leveraging, repatriation and global investor risk aversion," wrote strategist Callum Henderson, in a research note.
"While it may see further modest gains near term, we think that most of the move has already been seen."
Yen gains had been fueled in part as traders unwound formerly popular "carry trades" that had centered on selling yen and using the funds to buy riskier, higher-yielding assets.
The unwinding of carry trades has largely run its course, while weekly investment data and anecdotal evidence indicate Japanese institutional investors are again starting to look abroad for investment opportunities, Henderson said.
"Near term, we expect further choppy range trading in the Japanese yen against other major currencies given offsetting flows and fundamentals," he wrote. "However, a major test for yen bulls will come in April with the start of the new Japanese fiscal year."
Strategists at BNP Paribas said the outperformance of corporate debt relative to equity is supportive for the dollar, "as investors in the U.S. see the value of their portfolios developing relative stability, while the continued negative performance of equities suggests U.S. investors are taking more of their funds back home."
In addition, "dollar demand linked to [de-leveraging] and the autonomous bearish euro shock" from worries tied to Central and Eastern Europe "presents the perfect scenario for a further euro decline," they wrote.
The euro traded at $1.2529 versus the dollar, down from $1.2622 late Tuesday.
The British pound trimmed its loss versus the dollar but remained on the defensive at $1.4196, down from $1.4269 Tuesday.
The British pound dipped to a new daily low after the release of minutes of the Feb. 4-5 meeting of the Bank of England's Monetary Policy Committee.
The summary showed that the nine-member panel had unanimously backed a decision to seek permission from the U.K. Treasury to begin purchasing a wide range of assets, including government debt, in a bid to boost the money supply - a process known as "quantitative easing."
The minutes also showed that the committee had voted 8-1 in favor of the decision to cut the bank's key lending rate by a half point to 1%. MPC member David Blanchflower was the sole dissenter, arguing instead for a cut of a full percentage point to 0.5%.
In line with the bank's quarterly inflation report last week, "the overall tone of the minutes was clearly dovish," or in favor of a further easing of monetary policy, said Chiara Corsa, an economist at UniCredit MIB.
"We think that the BOE will likely deliver another 50 basis point rate cut in March and then stop, while immediately starting to implement" quantitative easing.
