Saturday, November 28, 2009

U.S. Dollar at 14 Year Low Against the Yen

The title of this blogpost and this article from Bloomberg below speak for themselves, and the words are not happy.

Robert J. Abalos, Esq.


Dollar Drops to 14-Year Low Against Yen on Fed Rate Outlook

Nov. 28 (Bloomberg) -- The dollar dropped to the lowest level versus the yen since July 1995 and fell against the euro as the Federal Reserve’s signal it will tolerate a weaker greenback encouraged investors to buy higher-yielding assets outside the U.S.

The dollar touched as low as 84.83 yesterday, the weakest in 14 years, spurring speculation Japan would intervene to curtail gains in its currency. For the week, the greenback fell 2.6 percent to 86.57 yen, the fifth consecutive weekly decline. The dollar and yen rallied against the Australian dollar and the South Korean won as Dubai’s attempt to delay debt repayments spurred investors to sell higher-yielding assets funded with the currencies.

“The market has re-priced the risk it is willing to sit with, noticeably against the dollar-yen,” said Lane Newman, director of currency trading at ING Financial Services Corp. in New York. “My sense is that damage has been done, the market being not as liquid as it has been in a long time. It is going to trade in this way and when the market has to do something it’s going to be very, very ugly.”

The dollar declined 0.7 percent to $1.4962 per euro from $1.4862 on Nov. 20. The yen rose 2 percent to 129.41 per euro, from 132.09. The U.S. currency fell 2.8 percent to 86.49 yen, from 88.88 yen.

Rate Check

Stocks and commodities dropped, Treasuries jumped and credit default swaps climbed after Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayment on much of its debt. The Persian Gulf emirate, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the worst global recession since World War II.

The yen declined yesterday against the dollar as Finance Minister Hirohisa Fujii said he will contact U.S. and European officials about exchange rates if needed, signaling his growing concern that the yen’s ascent will hurt the economy. The Bank of Japan checked rates at commercial banks in Tokyo, seen as a type of verbal intervention, Kyodo News Service reported.

Japan hasn’t sold its currency since March 16, 2004, when it traded around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($172 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Japan last bought the currency in 1998, purchasing 3.05 trillion yen as the rate fell as low as 147.66.

“If the dollar-yen falls below an 85 level the odds of intervention would rise materially,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “Clearly this is somewhat of an unfolding of events given previous signals of a strong yen policy but a strong yen will become a problem for the Japanese economy.”

Extended Period

The greenback fell earlier in the week on speculation the Fed will trail other central banks in increasing borrowing costs after policy makers said in the minutes of their November meeting that they will keep interest rates near zero for “an extended period” as long as inflation expectations are stable and unemployment fails to decline.

The minutes, released on Nov. 24, also said the dollar’s depreciation was “orderly,” indicating policy makers are willing to tolerate a weaker U.S. currency.

The economy probably lost 120,000 jobs in November, according to the median estimate of economists surveyed by Bloomberg before the Labor Department report on Dec. 4. The jobless rate probably held at a 26-year high of 10.2 percent for a second month, according to a separate survey.

Remain Dovish

The dollar has depreciated 7 percent against the euro, 4.5 percent against the yen and 13 percent versus the pound in 2009.

“The market has been readjusting to expectations that the Fed will remain dovish on monetary policy well into the first quarter of next year,” said Neil Jones, head of European hedge- fund sales in London at Mizuho Corporate Bank Ltd. “Additionally, there is a global shift of the dollar increasingly being viewed as the funding currency of choice for the carry trades.”

Investors use lower-yielding currencies for funding so- called carry trades, in which higher-yielding assets are purchased with funds borrowed in nations with low interest rates. The benchmark lending rate of zero to 0.25 percent in the U.S. makes its currency popular for funding such transactions.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against currencies of six major U.S. trading partners including the euro, yen and pound, dropped 0.9 percent on the week to 75. It has fallen 7.3 percent in 2009.