BLBG:Dollar Near 4-Week High as Fed Raises Economic Assessment
The dollar strengthened against most of its major counterparts after Federal Reserve policy makers raised their assessment of the U.S. economy and refrained from additional monetary easing.
The yen slid to an 11-month low versus the greenback as the yield spread between two-year debt in the U.S. debt and Japan to widened to the most since July, making dollar-based assets more attractive. The yen also dropped as Asian stocks extended a global rally, damping demand for the lower-yielding currency. The yuan weakened after Chinese Premier Wen Jiabao said the exchange rate may be near equilibrium and is likely to see more and larger two-way fluctuations.
“We should start to see signs of recovery in the U.S. economy being more dollar supportive,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp. (WBC), Australia’s second-largest lender. “Treasury yields are moving higher and the dollar is being supported, and that’s the story we expect to continue.”
The dollar rose 0.3 percent to 83.17 yen as of 1:49 p.m. in Tokyo, after reaching 83.21, the strongest level since April 18. The U.S. currency added 0.1 percent against the euro to $1.3074. The yen slid 0.2 percent to 108.72 per euro, extending a 0.3 percent drop yesterday.
The MSCI Asia Pacific Index of shares gained 1.1 percent today. The Standard & Poor’s 500 Index (SPX) climbed 1.8 percent yesterday, the biggest gain this year, while the MSCI World Index of stocks rallied 1.5 percent.
FOMC Statement
The Federal Open Market Committee kept the benchmark interest rate target unchanged yesterday at zero to 0.25 percent, where it’s been since December 2008. The central bank said it expects “moderate economic growth” and predicted the unemployment rate “will decline gradually.” In their last statement in January, policy makers said growth would be “modest” and unemployment “will decline only gradually.”
Fed Chairman Ben S. Bernanke is scheduled to address the national convention for the Independent Community Bankers of America today in Nashville, Tennessee.
The extra yield investors receive from two-year Treasuries over Japanese debt widened to 23.6 basis points yesterday, the most since July 28. Bank of Japan (8301) Governor Masaaki Shirakawa has said there is a “relatively high” correlation between the two- year gap and the dollar-yen rate. The gap was unchanged today.
Shirakawa and his board members left the central bank’s asset purchase fund at 30 trillion yen ($361 billion) yesterday after unexpectedly increasing bond buying by 10 trillion yen at the Feb. 14 meeting. The BOJ expanded loans designed to boost long-term growth by 1 trillion yen yesterday.
Barclays’ Forecasts
Barclays Capital raised its forecasts for the dollar against the yen, citing Japan’s current-account decline and differences in monetary policy with the U.S.
Downside risks to the dollar-yen rate have been “dramatically reduced,” according to a note dated today from Barclays analysts Masafumi Yamamoto and Guillermo Felices. The Fed’s statement indicated a gradual reduction in the central bank’s dovish stance, whereas in Japan “easing expectations will persist until the BOJ achieves its ‘goal’ of 1 percent inflation,” Barclays said.
The dollar will trade at 90 yen in six months and one year, up from a previous call of 82 in six months and 84 in 12 months, according to the note.
Current-Account Deficit
Japan posted a record 437.3 billion yen deficit in its January current account, the biggest shortfall since comparable data began in 1985, according to a report from the Ministry of Finance last week.
The yen has lost 5.6 percent in the past month, the worst performer among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar appreciated 0.8 percent, and the euro advanced 0.3 percent.
The yuan declined after Wen said the currency’s exchange rate “may possibly have reached an equilibrium level” based on Hong Kong trading since September. China’s government will “continue to enhance reform of the exchange-rate mechanism, especially to allow relatively wider, two-way fluctuation,” he said at a press conference in Beijing today.
The yuan weakened as much as 0.3 percent today to 6.3471 per dollar, the lowest level since December, before trading 0.2 percent lower at 6.3364.
To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
