Yen Falls as Lower Volatility Spurs Demand for Higher Yields
The yen weakened versus most of the
worlds other most-actively traded currencies as a decline in
volatility prompted investors to purchase higher-yielding assets
funded by low-cost loans in Japan.
Currency volatility has declined to the lowest level in
almost a month since the Federal Reserve cut benchmark borrowing
costs a half-percentage point on Jan. 30. The euro advanced
against the dollar and yen before the European Central Bank
meets this week, when its forecast to keep interest rates at a
six-year high.
“There seems to be some return of risk appetite, which is
driving the yen lower, said Samarjit Shankar, director of
global strategy for the foreign exchange group in Boston at Bank
of New York Mellon. “Investors seem to be pretty happy with the
U.S. rate cuts. Were in a period where its very difficult to
have a trend remain in place for a sustainable period. The
company is the worlds largest custodial bank, with more than
$20 trillion in assets under administration.
The yen declined to 106.74 versus the dollar at 4 p.m. in
New York, from 106.49 on Feb. 1. The Japanese currency fell to
158.26 per euro, from 157.67. The dollar weakened to $1.4827 per
euro, from $1.4802.
Japans currency dropped the most since Jan. 24 against the
pound, losing 0.7 percent to 210.75 yen. Gains in the British
currency may be limited before the Bank of Englands policy
decision on Feb. 7. Economists surveyed by Bloomberg News
forecast it will cut the benchmark interest rate a quarter-
percentage point to 5.25 percent.
Rand Declines
South Africas rand declined against all of the most-
actively traded currencies as a nationwide power shortage
reduces mining and industrial output. It fell 1.5 percent to
7.4732 per dollar. The currency has declined 8.2 percent this
year versus the dollar and 12.3 percent against the yen.
The Australian dollar, also known as the aussie, rose to a
three-week high against the yen, climbing as much as 1 percent
to 97.21, and a 2 1/2-month high against the dollar, gaining as
much as 0.6 percent to 91.01 U.S. cents. All 27 economists
surveyed by Bloomberg forecast the Australian central bank will
raise its benchmark rate a quarter-point to 7 percent tomorrow.
In carry trades, speculators get funds in a country with
low borrowing costs such as Japan and invest in one with higher
returns, earning the spread between the two. Japans benchmark
rate is 0.5 percent, the lowest among industrialized nations.
Yen Volatility
An index of price swings among the seven most-traded
currencies, including the U.S. dollar, euro and yen, fell to a
three-week low of 9.97 percent earlier today, according to the
JPMorgan Volatility Index. One-month implied volatility for the
yen against the dollar touched 11.5 percent, the lowest since
Jan. 10. Lower volatility limits the threat to profits earned on
carry trades.
The yens decline started when Asian shares advanced,
pushing the MSCI Asia Pacific Index to a three-week high.
Japans currency pared its loss against the dollar after U.S.
stocks fell. The Standard %26amp; Poors 500 Index declined 0.9
percent.
The euro strengthened as traders reduced bets that the ECB
will cut borrowing costs this year. ECB governing council member
Klaus Liebscher said the central bank will do what is needed to
prevent a price-wage spiral from boosting inflation, according
to a statement published by the Austrian central bank today.
The ECB will leave its benchmark interest rate at 4 percent
on Feb. 7, all 55 economists surveyed by Bloomberg forecast.
Interest-rate futures show the implied rate on the June Euribor
contract rose to 4.03 percent from 3.96 percent on Feb. 1. The
rate averaged 18 basis points more than the ECBs benchmark from
1999 until August, when the collapse of the U.S. subprime-
mortgage market sparked a squeeze on credit.
Feds Decision
Gains in the euro were limited as the worlds biggest
currency traders predicted the Feds decision to lower interest
rates 1.25 percentage points last month will end the dollars
two-year slide.
For the first time since 2003, investors are focused on
relative growth prospects rather than absolute borrowing costs,
said Geoffrey Yu, a London-based strategist with UBS AG, the No.
2 currency trader. The steepest rate cuts in seven years will
support expansion in the U.S. as Europe slows, said BNP Paribas
SA, the most accurate forecaster Bloomberg tracks. The dollar
will gain at least 9 percent against the euro this year, UBS and
BNP predict.
The euro may fall to $1.47 this week as its chart is set to
form a so-called triple top, said Kenichiro Fujita, manager of
derivatives-marketing in Tokyo at Aozora Bank Ltd., Japans
ninth-largest publicly traded lender by assets.
Euros Record
The currency advanced to a record of $1.4967 on Nov. 23,
with subsequent peaks at $1.4922 on Jan. 15 and $1.4949 on Feb.
1. The pattern indicates a currency may decline after it has had
three consecutive peaks.
“The euro rally is running out of steam, said Michael
Malpede, a senior currency analyst in Chicago at Man Global
Research. “Three months from now, the U.S. economy may be
stronger, and Europe is still facing headwinds.
The dollar will trade at $1.48 per euro by the end of this
quarter and $1.40 by year-end, according to the median forecast
of 44 analysts in a Bloomberg News survey.
Group of Seven finance ministers and central bankers will
discuss currencies when they meet in Tokyo on Feb. 9, said an
adviser to French Finance Minister Christine Lagarde.
`Exchange of Views
“There will be an interesting exchange of views on
exchange rates, which will be of particular interest concerning
the euro, Christophe Lecourtier, Lagardes diplomatic adviser,
told reporters in Paris today.
The G-7 includes the U.S., Japan, Germany, the U.K.,
France, Italy and Canada. The euro has gained 14.4 percent
against the dollar in the past 12 months.
“Investors want to know whether the G-7 has any interest
in protecting the key levels — thats $1.50 in the euro-dollar
and 105 in dollar-yen, said Greg Anderson, senior currency
strategist in Chicago at ABN Amro Holding NV. “Ahead of the
actual G-7 statement, I dont think well get a lot of price
action this week.
The dollar will trade between 105.80 and 107.50 yen this
week, and the euro will trade between $1.4720 and $1.4960,
according to Anderson.
