BLBG: Yen Declines as Investors Seek Higher Yields on Stock Rally
Oct. 15 (Bloomberg) -- The yen fell as improved company earnings fueled speculation the global economic recovery is gathering pace, boosting demand for higher-yielding assets.
The Japanese currency dropped most against the British pound and the New Zealand dollar as the MSCI World Index advanced for a second day. The Dollar Index declined as much as 0.5 percent to the lowest level in 14 months. The pound rose the most since June against the euro on speculation policy makers will pause their asset-purchase program next month.
“Good earnings and rising stocks underpin risk appetite,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “That will weigh on the yen as funding currency along with the U.S. dollar.”
The yen weakened to 89.97 per dollar as of 10:41 a.m. in London, from 89.44 in New York yesterday, and to 134.27 per euro, from 133.47. The dollar was little changed at $1.4927 per euro, from $1.4925. It traded at $1.4967 earlier, the weakest level since August 2008.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six major U.S. trading partners, dropped to 75.211, the lowest level since August 2008, as the MSCI World Index rose 0.4 percent.
“2009 has been a seminal moment in the market where the dollar’s hegemony as a reserve currency has come into question,” Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London, the world’s biggest custodian of financial assets. “A perfect storm of issues” may send the dollar to $1.60 by the beginning of 2010, he said.
Rising Stocks
The Dow Jones Industrial Average yesterday closed above 10,000 for the first time in a year after JPMorgan posted third- quarter earnings that beat analysts’ estimates. Goldman Sachs Group Inc. may say today that third-quarter profit almost tripled to $2.4 billion, according to analysts’ estimates. Roche Holding AG, the world’s biggest maker of cancer drugs, reported a 9.7 percent increase in third-quarter revenue today and raised its 2009 sales forecast.
“All factors point to continued dollar weakness and a break above critical resistance at $1.50 looks likely” against the euro, BNP Paribas SA analysts led by London-based Hans- Guenter Redeker, head of global currency strategy, wrote in a client note today.
Pound Surges
The pound headed for its biggest three-day gain against the dollar in more than two months as the Financial Times cited Bank of England Markets Director Paul Fisher as saying asset purchases may be paused to give the central bank the option “of doing more later.” Rising asset prices and improved confidence may be signs the program is working, central bank Deputy Governor Charles Bean said two days ago.
The U.K. currency jumped 1.3 percent to 92.2 pence per euro, the largest gain since June 1 based on closing prices, and strengthened 1.4 percent to $1.6196, bringing its advance in the past three days versus the dollar to 2.4 percent, the most since the first week of August.
Australia’s dollar traded at a 14-month high after central bank Governor Glenn Stevens said policy makers can’t be “too timid” in raising interest rates, stoking speculation it will add to last week’s unexpected increase.
The so-called Aussie rose to 91.90 U.S. cents, from 91.50 cents yesterday.
Goldman Sachs Forecasts
Goldman Sachs said the U.S. dollar is likely to extend declines against the euro and most commodity-backed currencies over the coming six months, based on the greenback’s correlation with cyclical assets and capital flows.
The bank expects the Australian dollar to peak at 95 cents and Brazil’s real to trade at 1.65 per dollar in three months.
The Federal Reserve minutes yesterday showed some U.S. policy makers were open last month to boosting the central bank’s $1.25 trillion mortgage-backed securities purchase program to revive the world’s biggest economy.
“The Fed is basically saying it’s not going to raise rates anytime soon, so the yield advantage enjoyed by many other currencies including the Australian dollar or the euro is going to be around for a long time,” said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s largest broker of trades between banks.
The Fed may report U.S. industrial output rose 0.2 percent in September, after gaining 0.8 percent in August, according to the median estimate of 75 economists in a Bloomberg News survey. The data is due tomorrow.
Sumitomo Forecast
Benchmark interest rates are 3.25 percent in Australia and 1 percent in the euro zone, compared with 0.1 percent in Japan. The Fed’s target rate for overnight bank loans is zero to 0.25 percent. The central bank may start raising its target rate in the second quarter of 2010, according to analysts’ forecasts compiled by Bloomberg.
The dollar may sink to 50 yen next year and eventually lose its role as the global reserve currency, Sumitomo Mitsui Banking Corp.’s chief strategist said, citing trading patterns and a likely double dip in the U.S. economy.
“The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” said Daisuke Uno at Sumitomo Mitsui, a unit of Japan’s third- biggest bank. “The dollar’s fall won’t stop until there’s a change to the global currency system.”
The greenback is heading for the trough of a super-cycle that started in August 1971, Uno said, referring to the Elliot Wave theory, which holds that market swings follow a predictable five-stage pattern of three steps forward, two steps back.
The dollar will target 50 yen during the current wave, based a retracement using the Fibonacci series of numbers, the strategist said.
To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
