Bloomberg News

Abe Spurs Biggest Yen Drop Since 1982 as Fed Views Stimulus End

June 29, 2013

The yen fell the most this year versus the dollar since 1982 as Japan’s Prime Minister Shinzo Abe implements plans to boost economic growth and rid the nation of deflation. Federal Reserve discussions of reduced monetary stimulus also boosted the greenback against Japan’s currency.

The Dollar Index had its best first-half year rally since 2010 as Fed Chairman Ben S. Bernanke on June 19 outlined the conditions that would prompt reduced asset purchases. Abe’s monetary and fiscal stimulus measures spurred a 32 percent rally in the Nikkei 225 Stock Average this year, damping demand for the yen as a haven. South Africa’s rand weakened 14.5 percent against the greenback amid persistent labor unrest. The U.S. unemployment rate declined to 7.5 percent this month, the Department of Labor is forecast to report July 5.

“The predominant trend has been toward weaker yen as the market look forward to the easy picking from Abenomics,” Andrew Wilkinson, chief economic strategist at Miller Tabak and Co. in New York, said in a telephone interview. “For the rest of this year, we will continue to see dollar strength and yen weakness as investors wrap their arms around the positive prospects from Abenomics.”

The yen fell 14.3 percent to 99.14 per dollar this year in New York. Europe’s shared currency declined 1.4 percent to $1.3010 per dollar. Japan’s currency weakened 11.3 percent versus the euro to 128.97.

Market Share

Volatility in the $4 trillion-a-day foreign-exchange market as measured by JPMorgan Chase & Co.’s Global FX Volatility Index has jumped 36 percent in 2013 and touched the highest in a year on June 24.

The U.S. dollar made up 62.2 percent of allocated reserves in the January-March period, compared with 61.2 percent the prior quarter, according to the International Monetary Fund data released yesterday. The euro’s share was 23.7 percent, the smallest percentage since 2004, compared with 24.2 percent in the fourth quarter of 2012.

Reserve managers around the world held about $194 billion in Australian and Canadian currencies, according to the first IMF data on the global holdings of the two currencies.

South Africa’s currency has fallen the most of the dollar’s 16 most-traded peers this year. An equally weighted basket of so-called BRICS emerging-market currencies has depreciated 4.5 percent in 2013 as traders that had been seeking higher yielding assets unwind their bets.

Dollar Bull

“We’re still constructive on the dollar, I think the growth story is going to hold,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. It’s “this concern about the Fed taking the punch bowl away that’s causing the dollar to gain strength against some of the higher yielding currencies.”

Former Goldman Sachs Asset Management Chairman Jim O’Neill coined the term BRIC in 2001 to describe Brazil, Russia, India and China -- the four emerging powers he estimated would equal the U.S. in joint economic output by 2020. Those nations invited South Africa to join their ranks in December 2010.

Markets gyrated even as Fed policy makers have sought to reassure investors that any changes to their $85 billion a month asset-purchase program is dependent on how the economy fares.

The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six U.S. trading partners, has climbed 4.2 percent this year. The gauge may rise to 85.7 by the end of the year, according to the median forecast of economists and strategists surveyed by Bloomberg.

Yield Gain

Treasury 10-year yields touched 2.66 percent on June 24, the highest since August 2011. Gold prices fell to a 34-month low and had the biggest quarterly drop in at least 93 years.

“The markets have been very volatile and they remain very sensitive to Fed communication and economic data,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “The market is not patient as no one wants to be the last one out the door.”

U.S. payrolls may have increased 165,000 in June after growing 175,000 the previous month, according to the median forecast in a Bloomberg survey. The unemployment rate climbed to 7.6 percent in May from 7.5 percent as a surge in the number of people entering the labor force swamped the number of positions available.

Deutsche Bank AG’s G10 FX Carry Basket index fell has fallen 6.8 percent this quarter, the most since third-quarter of 2011. The gauge has declined 3.4 percent in 2013.

The yen has weakened 8.3 percent this year among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. Australia’s currency has fallen 7.8 percent, while the U.S. dollar has rallied 6.4 percent and the euro gained 4.8 percent.

Government Business

“There are some doubts over how quickly -- namely structural reform from the government -- would be passed and impact the economy,” Miller Tabak’s Wilkinson said. “That’s worried traders.”

Under Abe, Japan is rolling out unprecedented monetary easing and spending $105 billion to reverse more than 10 years of deflationary malaise, measures that weakened the yen and made Japan the best-performing major stock market this year.

The prime minister said later this year would be the soonest his government presents a legislative growth strategy to accompany monetary and fiscal stimulus -- the first two arrows of his policies dubbed Abenomics.

The euro has gained against 13 of its 16 major peers this year as the region’s economy is forecast to shrink 0.6 percent in 2013, the same as the previous year, according to median forecast of economists surveyed by Bloomberg. The U.S. may grow 1.9 percent in 2013, a separate survey shows. The European Central Bank cut its benchmark interest rate to a record-low 0.5 percent in May.

Euro Zone

“Maybe people are a little more anesthetized to the euro-zone crisis than previously, but going forward we think it’s still going to be a relative growth story,” RBS’s Kim said. “We think bouts of risk aversion or concern could contribute to dollar strength throughout the year.”

South Africa’s rand has gained 2.1 percent to the greenback this month, while Australia’s dollar has declined 4.5 percent. This quarter, the euro has led all major gainers with a 1.5 percent increase, while the worst-performing Aussie has slipped 12.3 percent.

The dollar will end the year at $1.27 per euro and 105 yen, according to the median estimates in Bloomberg News surveys of analysts.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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