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Japan selling yen possibility causes yen fall Original Source Link: (May no longer be active)
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Yen Falls Versus Dollar, Euro on Concern Japan to Sell Currency
Nov. 10 (Bloomberg) -- The yen fell by the most against the dollar in six months on concern Japan may sell its currency to protect exports and economic growth.
Traders reversed bets that the yen would strengthen after the Bank of Korea vowed to take action to slow ``excessive'' gains in its currency, fueling speculation Japan will follow. Wagers that the yen would advance reached the highest since February on the Chicago Mercantile Exchange last week.
``Investors previously had the comfortable assumption that Asian central banks would allow their currencies to appreciate without any protest,'' said Kenneth Landon, a senior currency strategist at JPMorgan Chase & Co. in New York, the second- biggest U.S. bank. ``The yen is really moving on this.''
Japan's currency weakened to 107.11 per dollar at 3:50 p.m. in New York from 105.67 yesterday, according to electronic foreign-exchange dealing system EBS. It was at 138.20 per euro, down from 136.30. The dollar traded at $1.2902 per euro after reaching a record $1.30 per euro in the first minutes after the U.S. said its trade gap was the third-widest on record.
``There was a heavy dollar-short position piled up ahead of the report on trade,'' said Tetsuhisa Hayashi, vice president and manager of Bank of Tokyo-Mitsubishi Ltd.'s foreign-exchange group. ``We saw some dollar buying to minimize trading losses at 106 yen.''
The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 36,814 on Nov. 2, the most since Feb. 20, figures from the Washington-based Commodity Futures Trading Commission showed on Nov. 5.
Toyota, Kawasaki
After a 4 percent gain in the yen against the dollar in the past three months, Japanese policy makers are ``ready to take appropriate action'' if moves in the currency markets run counter to the country's economic fundamentals, Finance Minister Sadakazu Tanigaki said Nov. 2.
Fujio Cho, president of Toyota Motor Corp., said this week ``business circumstances this period are much more difficult than a year ago,'' in part because of the yen's rally.
Kawasaki Heavy Industries Ltd., Japan's second-biggest maker of heavy machinery, said each one-yen gain in the value of its currency will reduce annual profit by 1.8 billion yen. The yen's strength eroded profit in the first half of the year by 7 billion yen, the company said earlier this month.
Japan sold a record 32.9 trillion yen ($310 billion) in the year ended March 31 to stem the currency's gains and protect profits of Japanese exporters. The yen strengthened from a low of 121.15 on April 25, 2003, to 103.40 on March 31, 2004. Japan hasn't sold currency since.
U.S. Trade Gap
Landon said the Bank of Japan probably won't try to defend a particular level on the yen, and ``instead they will focus on the speed of the move. We don't see them intervening until dollar-yen gets down to 103.''
Korea's central bank likely purchased about $500 million against the won during the Asian morning, Dresdner Kleinwort Wasserstein said in a report. The central bank doesn't give figures on the amount of won it sells.
The U.S. currency fell earlier today against the euro on concern increasing amounts of dollars will need to be converted to other currencies to pay for imports. The trade gap, the amount by which imports exceed exports, was $51.6 billion, compared with a revised $53.3 billion in August.
The trade deficit ``is still above $50 billion, and that's a large number by any means,'' said Chris Melendez, president of currency hedge fund Tempest Asset Management in Newport Beach, California. ``The Street is worried about the U.S.'s ability to fund the deficit.''
Limit `Flexibility'
Melendez said the dollar will weaken to $1.3250 per euro by year-end. ``The market seems to want to gun for $1.30,'' he said.
The trade gap was a record $55 billion in June. The excess goods and services imports over exports also contributes to a widening shortfall in the current account, which measures trade, services, tourism and investments.
The current-account deficit was a record $166.2 billion in the second quarter, equivalent to 5.7 percent of gross domestic product. The deficit was 5.1 percent of GDP in the first quarter.
Financing the gap may hurt the dollar and push interest rates up as the U.S. tries to attract the $1.8 billion a day needed to maintain the value of the currency, according to a study by the Federal Reserve Bank of New York released Oct. 28.
The trade and U.S. budget gaps ``will limit monetary policy and the Fed's flexibility,'' said Sudesh Mariappa, who oversees $43 billion of debt as head of global portfolio strategies at Pacific Investment Management Co. in Newport Beach, California.
Fed Raises Rate
The dollar will trade between 104 yen and 108 yen through the end of the year, and between $1.28 per euro and $1.32, Mariappa said.
The U.S. currency remained higher against the yen as the Fed today raised its benchmark interest rate by a quarter-percentage point and said it would stick to its plan for a ``measured'' pace of future rate increases.
Policy makers lifted the overnight lending rate between banks to 2 percent from 1.75 percent today, the fourth increase this year and a signal policy makers are confident the world's largest economy will keep growing.
``This hints that they'll continue'' raising rates next month, said Daniel Tenengauzer, a currency strategist in New York at Lehman Brothers Holdings Inc. ``They are a little bit more bullish on the output story and their outlook for jobs has improved.''
Rate Expectations
All 89 economists surveyed by Bloomberg expected the policy- setting Federal Open Market Committee to lift the rate to 2 percent. ECB policy makers have kept their main interest rate at 2 percent since June last year. The Bank of Japan's benchmark rate is almost zero.
Traders raised bets the Fed will boost its benchmark rate next month after the U.S. added 337,000 jobs last month, almost twice the number economists predicted.
Federal funds futures show traders are pricing in about an 80 percent chance the Fed will push its target rate to 2.25 percent by year-end. The yield on the December contract, the expected average rate for that month, was 2.12 percent, up from 2.07 percent a day before the Labor Department on Nov. 5 said U.S. companies hired the most workers since March in October.
European officials raised concern about the impact of the euro's rise to a record on economic growth.
``Of course we are worried,'' EU Monetary Affairs Commissioner Joaquin Almunia said today in Brussels. ``We have to avoid the excessive volatility of the exchange rates.''
Further gains in the euro may burden European exporters, while curbing the inflationary effect of rises in dollar- denominated prices of commodities such as oil. Earlier this week, European Central Bank President Jean-Claude Trichet said the single currency's advances were ``not welcome'' and called recent exchange-rate moves ``brutal.''
Last Updated: November 10, 2004 15:55 EST
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