Yen Slides to 7-Month Low on U.S. Growth Outlook; Pound Weakens

Feb 23, 2012

By Keith Jenkins and Candice Zachariahs

Feb. 22 (Bloomberg) – The yen weakened to a seven-month low against the dollar amid speculation U.S. growth is gathering strength, damping demand for the Asian nation’s currency.

The yen slid for a fifth day versus the greenback as the extra yield offered by two-year Treasuries over similar-maturity Japanese bonds increased to a six-month high. The Dollar Index rose before a U.S. report that economists said will show existing home sales increased. The pound weakened after Bank of England minutes showed two policy makers voted for a larger increase in asset purchases than the amount finally agreed.

“With the U.S. economy rehabilitating, the trend in yields is up and there may be more upside” to the dollar against the yen, said Lauren Rosborough, a senior foreign-exchange strategist at Societe Generale SA in London. “When domestic investors in Japan can see an improving yield offshore, then they would be looking to sell out of yen and buy the dollar.”

The yen dropped 0.6 percent to 80.22 per dollar at 7:22 a.m. New York time, after falling to 80.36, the weakest level since July 12. Japan’s currency slid 0.6 percent to 106.16 per euro, after sliding to 106.33 yen, the lowest since Nov. 14. The euro was little changed at $1.3235.

The spread between U.S. and Japanese two-year notes expanded to 19.05 basis points yesterday, the most since Aug. 1, according to closing-market data compiled by Bloomberg. The difference was 18.6 basis points today.

Asset Purchases

The Bank of Japan on Feb. 14 unexpectedly expanded its asset-purchase program to 30 trillion yen from 20 trillion, with 19 trillion yen set aside for government bonds. The central bank also said it will target 1 percent inflation “for the time being.” Consumer prices fell at a 0.2 percent annual rate in December, government data show.

BOJ Governor Masaaki Shirakawa told Japanese lawmakers today that policy makers set a price target to show the central bank’s resolve and it will take further steps to end deflation.

“The degree of expansion by the BOJ was not momentous in a relative sense, either compared to previous expansions or when compared to the other central banks, but the signal, coupled with a trade deficit, provoked additional impetus to sell the yen,” Societe Generale’s Rosborough said.

The Dollar Index, which tracks the U.S. currency against those of six major trading partners, climbed 0.2 percent to 79.263 after dropping 0.4 percent in the previous two days.

Sales of previously owned homes in the U.S. rose 1.1 percent in January to a 4.66 million annual rate, the highest level since May 2010, according to a Bloomberg News survey before the National Association of Realtors’ report today.

‘Turn Around’

“The stronger the U.S. economy, the stronger the sense that the interest-rate story will turn around and some of the strength in the yen relative to the U.S. dollar starts to reverse course,” said Gavin Stacey, a strategist at Barclays Capital in Sydney.

UBS AG raised its forecasts for the dollar versus the yen, according to an e-mailed report.

“We now target a move to 85 by the end of this year and 90 by the end of 2013,” analysts including Mansoor Mohi-uddin in Singapore wrote in the note. Previous projections were 80 yen and 85 yen respectively, according to the report.

The yen has depreciated 6.6 percent in the past three months, the biggest decline among 10 developed nation peers tracked by Bloomberg Correlation Weighted Indexes. The dollar weakened 2.2 percent, and the euro dropped 4.4 percent.

Fitch Cuts Greece

The euro held gains against the yen even after Fitch Ratings cut Greece’s credit rating to C from CCC. A default by the nation is likely in the near term, the ratings company said in a statement today.

The 17-nation currency has strengthened over the past week after European Union finance ministers awarded 130 billion euros in aid to Greece and reached an accord for greater debt relief from investor representatives.

Sterling fell versus all but one of its 16 major peers and gilts gained as the minutes revealed Adam Posen and David Miles wanted a 75 billion-pound ($117.8 billion) boost in quantitative easing, instead of the 50 billion pounds supported by the other seven policy makers.

“The minutes are a dovish surprise,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The market was moving to reduce the scope for further quantitative easing, which was supporting the pound, and that’s now being seen as incorrect because two members voted for bigger bond purchases. We see further downside for the pound.”

Sterling declined 0.4 percent to 84.22 pence per euro after falling to 84.33 pence, the weakest level since Dec. 13. The U.K. currency slid 0.5 percent to $1.5703.

The implied volatility of three-month options for Group of Seven currencies fell as low as 9.94 percent yesterday, the least since Feb. 14, and was at 10 percent today, according to the JPMorgan G7 Volatility Index.

A decrease makes investments in currencies with higher benchmark rates more attractive because it shows the risk is less that market moves will erase profits on such trades.

–With assistance from Mariko Ishikawa in Tokyo. Editors: Paul Dobson, Nicholas Reynolds

To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

(Source: businessweek.com)