Bloomberg News

Yen Weakens to 20-Month Low on Abe BOJ Pledge; Euro Drops

December 24, 2012

The yen fell to a 20-month low versus the dollar after Japan’s incoming Prime Minister Shinzo Abe said he will consider changing the law governing the central bank unless it boosts its inflation target.

The 17-nation euro erased gains against the greenback as Italian Prime Minister Mario Monti said he would consider being the candidate for a coalition backing his economic agenda, even after saying he won’t run in the country’s February elections. Mexico’s peso is the biggest winner against the dollar this year, while the Brazilian real has lost the most.

“The currency’s drop has been due to the pressure exerted by Shinzo Abe on the BOJ to increase their monetary activism,” said Ravi Bharadwaj, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. (WU:US) “Increases in quantitative easing or interest rate reducing programs generally weaken a nation’s currency via the carry trade.”

The yen fell 0.8 percent to 84.94 per dollar at 5 p.m. New York time. It was the weakest level since April 11, 2011. The euro gained 0.8 percent to 111.97 yen. The shared currency was little changed at $1.3185, after gaining as much as 0.4 percent.

Japan’s currency has tumbled 12.9 percent this year, including a 3.8 percent drop in the past month, the worst performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has weakened 2.7 percent this year and the euro has dropped 0.9 percent.

Rand Leads

The South African rand leads all major currencies this month against the greenback, appreciating 4 percent. The yen has declined the most out of 16 counterparts versus the dollar, decreasing 2.9 percent.

South Korea’s won has appreciated more than all of its peers versus the dollar this quarter, adding 3.5 percent. The Swiss franc has been the second-biggest gainer, increasing 2.6 percent.

The real has lost 10.3 percent versus the dollar in 2012. Mexico’s peso leads all 16 of the dollar’s biggest peers with a gain of 7.4 percent.

Japan’s Abe said he will consider revising the central-bank law if policy makers fail to increase the inflation target to 2 percent from 1 percent at their January meeting, he said on Fuji Television yesterday.

Technical Levels

The yen may fall to its lowest level since May 2010 after closing last week above 84.20, its March high. The currency will test resistance at 94.13, the 38 percent Fibonacci retracement of the yen’s appreciation from June 2007 to October 2011, Richard Adcock, head of fixed-income technical strategy at UBS in London, wrote today in a note to clients.

The currency weakened against the dollar even after data showed that futures traders trimmed bets on a weak yen from a five-year high.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain was 89,163 on Dec. 18, figures from the Washington-based Commodity Futures Trading Commission showed. The so-called net shorts were at 94,401 a week earlier, the most since July 2007.

“Abe saying he will rewrite the legislation for the Bank of Japan (8301) if it doesn’t impose its own higher inflation target has definitely been a reason for yen underperformance,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York, said in a telephone interview. “We’re finally seeing how exactly he’s going to implement one of his key election platforms, which is a much more dovish BOJ.”

Extreme Moves

Declines in the yen may temper as the 14-day relative strength index against the dollar touched 21.7, below the 30 level for the ninth day. A reading of 30 or lower indicates an asset may have fallen too far too quickly.

U.S. political leaders are debating how to avoid the so- called fiscal cliff, the more than $600 billion in automatic tax increases and spending cuts that will take effect in January unless Congress acts.

The Standard & Poor’s 500 Index of U.S. shares fell 0.2 percent today. The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, was little changed at 79.67, following a 0.5 percent advance on Dec. 21.

“The Senate will produce some sort of a compromise stop- gap measure that will not be filibustered by the GOP and will then move on to passage in the House,” said Boris Schlossberg, managing director of foreign exchange at BK Asset Management, an investment advisory firm in New York. “The end of the week, therefore, sets up a possible volatility event for the market.”

Won Forecasts

Strategists are raising won forecasts at a faster pace than any other currency on bets South Korea’s new president will tolerate appreciation driven by capital inflows and an economic recovery.

Analysts have bolstered their median predictions for the end of 2013 by 3.3 percent since Sept. 30, the most among 65 global currency pairs tracked by Bloomberg. The won, which has advanced 7.3 percent versus the dollar this year, will strengthen an additional 2.9 percent in 12 months to its highest level since August 2008, a Bloomberg survey shows.

Park Geun Hye, who takes office in February after winning election on Dec. 19, has called for curbing the dominance of conglomerates such as Samsung Electronics Co. and Hyundai Motor Co. The won was little changed at 1,074.15 per dollar today.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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