BLBG : Dollar, Yen Strengthen on Signs Trade Protectionism Increasing
Sept. 14 (Bloomberg) -- The dollar and the yen rose against the euro on speculation trade protectionism between the U.S. and China will increase, boosting demand for the relative safety of the two currencies.
The U.S. currency gained versus 15 of its 16 major counterparts after China announced a probe into the alleged dumping of American auto and chicken products, two days after the Obama administration imposed tariffs on imports of tires from the Asian nation. The yen climbed toward a seven-month high against the dollar on prospects Japanese investors will repatriate earnings before the end of the fiscal first half this month and as Asian stocks declined.
“The dollar should bounce back on the back of trade tensions that have occurred over the weekend between the U.S. and China,” said Greg Gibbs, a currency strategist in Sydney at Royal Bank of Scotland Group Plc, in a Bloomberg Television interview. The news is “creating some fears this could spill over to U.S. equity markets or equity markets in general and take some of that risk appetite off the table,” he said.
The dollar advanced to $1.4546 per euro as of 12:28 p.m. in Tokyo from $1.4571 in New York on Sept. 11. It earlier touched $1.4608, near the year-to-date low of $1.4634. The U.S. currency traded at 1.0388 Swiss francs after falling to 1.0340 on Sept. 11, the weakest level since July 29, 2008.
The yen climbed to 131.54 per euro from 132.17 in New York on Sept. 11. The Japanese currency rose to 90.42 against the dollar from 90.71, after earlier gaining to 90.21, the highest level since Feb. 12.
Asian stocks declined, with the MSCI Asia Pacific Index of regional shares dropping 1.2 percent and futures on the Standard & Poor’s 500 Index falling 0.9 percent.
‘Unfair Trade Practices’
Chinese industries have complained that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site yesterday. The Beijing-based ministry is also looking into subsidies for the products, it said. It didn’t specify the imports’ value.
The European Central Bank said last week that rising protectionism may hamper world trade and undermine the global economy’s recovery from recession. The U.S. placed tariffs starting at 35 percent on $1.8 billion of tire imports from China, backing a United Steelworkers union complaint against the second-largest U.S. trading partner.
The dollar benefits from risk aversion because it is the world’s main reserve currency. Japan’s currency typically rises during times of financial turmoil because the nation’s trade surplus means the country doesn’t have to rely on overseas lenders.
The yen strengthened against all 16 major currencies on prospects that Japanese companies will bring back their overseas earnings to take advantage of a tax break that went into effect this fiscal year.
Yen Repatriation
“There are expectations for yen repatriation ahead of Japan’s half fiscal year end,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The yen is likely to appreciate further.”
The Japanese government announced this year that it would waive taxes on repatriated profits from April 1 to help support the economy. Under previous laws, companies had to pay a combined 40 percent tax on overseas earnings.
Japanese investors sold 205 billion yen ($2.3 billion) more in overseas securities including bonds and notes than they bought during the week ended Sept. 5, according to figures from the Ministry of Finance in Tokyo on Sept. 10.
Fed’s Policy
The dollar may pare gains on speculation the Federal Reserve Board won’t rush to exit its policy of pumping liquidity into the banking system.
“Falling U.S. interest rates triggered selling of the dollar,” said Yuji Kameoka, a Tokyo-based strategist at Daiwa Institute of Research Ltd., a unit of Japan’s second-largest brokerage. “As long as there are prospects for sustained monetary easing in the U.S. amid the jobless recovery, the weak trend for the dollar will continue.”
Federal Reserve Bank of Richmond President Jeffrey Lacker will speak later today at the annual meeting of the Risk Management Association, in Charlotte, North Carolina. San Francisco Fed President Janet Yellen will speak today on the U.S. economic outlook in the Californian city.
The three-month London interbank offered rate, or Libor, for dollar loans dropped below that of the Swiss franc on Sept. 8, making the greenback the cheapest currency to fund purchases of higher-yielding assets. The spread between three-month Libor for yen and dollar loans was 7.25 basis points on Sept. 8, according to British Bankers’ Association data, the widest gap since March 1993.
Sharpe Ratio
Using the world’s reserve currency to fund carry trades became more profitable and less risky last month than with the yen for the first time since March 2008, Bloomberg data show. The difference in Sharpe ratios for dollars and yen, a measure of performance versus risk, has averaged 1.35 since May, compared with minus 0.37 since 2004. The higher the Sharpe ratio, the higher the risk-adjusted return.
“The dollar is the big funding currency,” said Jonathan Clark, vice chairman of New York-based FX Concepts Inc., the world’s largest currency hedge fund, with $9 billion in assets under management. “The reason why people are borrowing the U.S. dollar for carry trade is A: It’s very cheap to fund, and B: The expectation is it’s going to go down.”
In carry trades, investors borrow in a country with low borrowing costs and invest where returns are higher. U.S.’s target lending rate of as low as zero compares with 3 percent in Australia and 2.5 percent in New Zealand.
