BS: Dollar Reaches 2008 High Against Yen as Yield Outlooks Diverge
The dollar reached a five-year high versus the yen as the yield difference between Treasuries and Japanese bonds traded at almost the widest since April 2011 amid speculation on the timing of a cut in U.S. monetary stimulus.
Japan’s currency headed for a seventh weekly drop against the greenback before the Federal Reserve and the Bank of Japan hold policy meetings next week. The yen touched the lowest in five years versus the euro on bets the BOJ will expand its asset-purchase program to boost the economy. The euro weakened as European Central Bank policy maker Peter Praet said the region’s recovery is “fragile.”
“The market sees an increasing risk of a move by the Fed in its meeting next week,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a phone interview. “Dollar-yen has led this over the last week and a half or so, but we’re seeing the other major pairs play a little bit of catch-up in terms of pricing in a slightly higher risk of a modest Fed taper next week.”
VIDEO: Fed Tapering Seen as Biggest Theme for Currencies
The greenback gained 0.1 percent to $1.3746 per euro at 8:46 a.m. in New York, after falling to $1.3811 on Dec. 11, its lowest level since Oct. 29. The U.S. currency decreased 0.1 percent to 103.33 yen, after touching 103.92, the strongest level since October 2008. Japan’s currency appreciated 0.3 percent to 141.81 per euro.
Yield Spreads
The Treasury 10-year yield traded at 2.86 percent after rising two basis points yesterday, according to Bloomberg Bond Trader prices. The yield premium over equivalent Japanese government bonds was at 2.16 percentage points, almost the 2 1/2-year high of 2.24 reached on Dec. 5.
The Fed will probably begin reducing $85 billion in monthly bond purchases at its Dec. 17-18 meeting, according to 34 percent of economists surveyed on Dec. 6 by Bloomberg News, an increase from 17 percent on Nov. 8.
“The prospect of Fed tapering, either sooner or later, and continued monetary easing by the Bank of Japan remain a powerful driver of dollar-yen gains specifically, and obviously broad yen trade-weighted depreciation,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. The yen will drop to 110 per dollar at the end of next year, according to Standard Chartered, compared with a median forecast of 108 in a Bloomberg News survey of analysts.
The JPMorgan G-7 FX Volatility Index dropped two basis points to 8.68 percent after rising to 8.78 percent, the highest level since Oct. 2. It has increased from a 2013 low of 7.48 percent reached on Oct. 28, and is still below the year’s average of 9.23 percent.
BOJ Policy
The BOJ, which buys more than 7 trillion yen ($70 billion) of Japanese government bonds every month in its bid to stoke inflation, starts a two-day meeting on Dec. 19. The central bank aims to keep ultra-easy monetary policy in place beyond the two-year timeframe, the Financial Times reported, citing an interview with Governor Haruhiko Kuroda.
The yen has weakened 14.3 percent this year, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar appreciated 3.9 percent and the euro climbed 8.7 percent, the biggest advance.
“The reasons why the yen is depreciating now are the same reasons it was depreciating earlier in the year, it’s the fact that people are talking about chances that the BOJ will expand its monetary policy again” next year, said Sonja Marten, a currency strategist at DZ Bank AG in Frankfurt. “To a degree if the Fed begins tapering this puts it on a path that can eventually lead to higher rates and this might be a factor too” pushing the yen lower against the dollar, she said.
The euro area’s recovery is muted and fragile, ECB Executive Board member Praet said in Antwerp.
Aussie Losses
The Aussie headed for an eighth weekly loss as Reserve Bank Governor Glenn Stevens signaled a weaker currency is preferable to lower interest rates. It touched 89.10 U.S. cents, the least since Aug. 30, after he said 85 cents “would be closer to the mark than 95 cents,” in an interview in the Australian Financial Review today.
“The RBA appears to have made a strategic decision in mid-October that they could get the Aussie down and they should try and get it lower as they downgraded their view of the resource sector,” said Greg Gibbs, a Singapore-based strategist at Royal Bank of Scotland Group Plc.
Australia’s dollar added 0.1 percent to 89.49 U.S. cents and was on course for a 1.7 percent weekly decline.
To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
