BLBG: Dollar to Rise Against Yen as Investors Return to Carry Trade, RBS Says
The yen may slump against the dollar in 2011, after gaining last year, as traders shift to using the Japanese currency to fund investments in higher-yielding assets, according to Royal Bank of Scotland Group Plc.
Investors should look for opportunities to bet the yen will fall against the U.S. currency, Canada’s dollar and the Singapore dollar, said Greg Gibbs, a currency strategist at RBS Australia in Sydney. Rising strength in the U.S. economy and Japanese investors allocating more savings to higher-yielding investments will lead foreign and Japanese investors to sell the yen to buy dollar-denominated assets, he said.
“The prospect of any rate rise in Japan is so far away that at some point over the next year it will return as a funding currency,” Gibbs said in a telephone interview.
Japan has held its benchmark interest rate at 0.1 percent since December 2008. The yield spread between two-year U.S. and Japanese government securities touched 63 basis points yesterday, or 0.63 percentage point, the widest since June.
The yen gained 3.2 percent over the past year among 10 developed-nation currencies, according to Bloomberg Correlation- Weighted Indexes. It weakened 2 percent over the past month, they showed, and traded yesterday at 82.36 per dollar in New York.
Household investors in Japan allocated double the amount of assets to mutual funds in 2010 as they did in 2009, according to an RBS note to clients that Gibbs wrote yesterday, citing the Investment Trust Association.
“Japanese investors over the past year have got more confident using the yen, conducting their own form of the carry trade, which is basically capital outflow,” he said.
In carry trades, investors borrow money in countries with low interest rates to invest in higher-yielding assets.
“I think that may be the case which will encourage increased outflows from Japan and possibly other foreign investors using the yen as their funding base as well,” Gibbs said.
To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
