Most of the stories and analysis featured on the forex blogs concern the Dollar, or at the very least, how other currencies are performing relative to the Dollar. But there are many important currency pairs that don't involve the Greenback, including the Euro/Yen. Last week, the Euro climbed to its highest level in 2008 against the Yen, thanks to diverging economies and interest rates. Neither economy is particularly strong, but the Bank of Japan is using especially bearish language to describe its faltering economy. It should be noted that despite a prolonged period of economic growth, the Bank of Japan avoided raising interest rates even once. Meanwhile, the European Central Bank is becoming increasingly hawkish in its monetary policy rhetoric. The result has been a sustained (and soon-to-widen) interest rate differential, which has contributed to a dynamic that is unique to these two currencies. Bloomberg News reports:
The yen fell against every major counterpart today after a government report showed Japan's longest postwar expansion may be over.
The euro rose to the strongest level this year against the Japanese yen and traded near a two-week high against the dollar as traders increased bets the region's central bank will raise rates as early as next month.
The euro has appreciated 2.6 percent versus the yen and 2.4 percent against the dollar since June 5, when ECB President Jean-Claude Trichet signaled interest rates may rise July 3 to quell inflation. The yen fell against every major counterpart today after a government report showed Japan's longest postwar expansion may be over.
``When you have yields in Europe and the U.S. about to pick up, it does lead to outflows from Japan into foreign markets,'' said Hans Guenter Redeker the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank. ``In the aftermath of Trichet's comments, European yields have risen, providing euro-yen support.''
The euro rose to 166.65 yen as of 7:23 a.m. in New York, from 165.54 last week. It strengthened to $1.5802, from $1.5778. The yen dropped to 105.70 versus the dollar, from 104.93.
An interest-rate increase next month is ``possible,'' Trichet said in Frankfurt last week. It was a message that the markets have understood ``quite well,'' ECB council member ,Nout wellink who also heads the Dutch central bank, was quoted as saying in an interview with Market News International.
`Rhetoric Differential'
``The euro is gaining in the context of the rhetoric differential between the European Central Bank and the Fed,'' said ,Daragh Maher , a London-based currency strategist for Calyon, the investment-banking arm of Credit Agricole SA. ``The ECB is much more strident than the Fed, which has said it will stop easing. That's very different from saying you're about to hike.'' The euro may rise to $1.60 by quarter-end, Maher said.
The ECB will lift the main refinancing rate twice this year as inflation exceeds the central bank's target, taking it to 4.5 percent by year-end, according to interest-rate futures trading. Inflation is running at the fastest pace in 16 years.
Trichet will speak at a forum in Paris at 6:30 p.m. local time. The ECB last week kept its main refinancing rate at a six- year high of 4 percent, unchanged since last June.
Traders stepped up bets the central bank will boost rates by the end of this year, with the implied yield on the December Euribor futures contract rising to 5.47 percent, from 5.01 percent on June 4. European two-year notes had their biggest decline in 4 1/2 months, pushing the yield to 35 basis points more than 10 year-notes, the most since October 1992.
Japan at `Turning Point'
Japan's economy may be reaching a ``turning point,'' the Cabinet Office said today after releasing figures that showed the coincident index, a measure of current economic activity, fell to 101.7 in April from a revised 102.4 the previous month. The government hasn't described the world's second-largest economy in such terms since the most recent recession in 2001.
Japanese importers took advantage of recent gains to buy yen, said , Yuji Saito,head of foreign-exchange sales in Tokyo at Societe Generale SA, France's second-largest bank by market value. The yen may fall to 105.60 a dollar today, he said.
Trading volumes may be less than usual today as financial markets in Australia, China, Hong Kong and the Philippines are closed for public holidays, said ,Tetsuhisa Hayashi chief manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.
The dollar rose versus the yen as Lehman Brothers Holdings Inc. reported a record $2.8 billion second-quarter loss and said it will raise $6 billion in capital in a public offering.
Dollar Index
The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, fell for a third day to 72.323, from 72.390 on June 6. The U.S. currency traded at $1.9781 against the British pound, from $1.9708, and was at 1.0174 versus the Swiss franc, from 1.0185.
Gains in the dollar against the yen may be limited by speculation an U.S. industry report today will show the worst housing slump in a quarter century is weighing on the world's biggest economy.
The U.S. currency touched the lowest in almost two weeks versus the euro after a government report June 6 showed the U.S. unemployment rate climbed the most in two decades. It also traded near its weakest level in 25 years against the Australian dollar as investors reduced bets the Federal Reserve will raise interest rates this year.
Fed Futures
The dollar traded at 96.30 U.S. cents per Australian dollar from 96.26 cents on June 6, near a 25-year low of 96.54 cents reached May 21.
The U.S. currency has fallen 11 percent against the euro and 9 percent versus the yen since September when the Fed began to lower borrowing costs. Futures on the Chicago Board of Trade show a 61 percent chance the Fed will increase its 2 percent target rate by at least a quarter-percentage point by December, compared with 66 percent odds a week earlier.
The National Association of Realtors will today report pending home resales fell 0.5 percent in April after a 1 percent decline in March, a Bloomberg News survey of economists showed.
Volatility implied by dollar-yen currency options rose to a one-week high on speculation the U.S. economy will slow and credit losses will widen, said ,Takeharu Miki, options manager at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.
Traders quote implied volatility, a measure of expectations for future currency swings, as part of pricing options. A strike, which is the price an option holder may buy or sell a currency, is at-the-money when it is near the spot market rate.
Dollar to `Gain Ground'
The dollar may still be supported by speculation Fed Chairman Ben S. Bernanke will reiterate concern the currency's 15 percent decline against the euro in the past year will stoke inflation. Bernanke, who speaks at a Boston Fed conference at 8:15 p.m. local time, said on June 3 he's aware of the impact a falling currency can have on price expectations.
``I expect the dollar to gain ground,'' said Hiroshi Yoshida, foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan's fifth-largest publicly traded lender. ``Bernanke has made it clear he's uncomfortable with the dollar falling much further. We also can't rule out a rise in interest rates.''
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