Yen declines as economic optimism may increase demand for yield

The yen fell against the New Zealand dollar and South African rand as renewed optimism the global economy is recovering spurred demand for riskier investments.

The yen headed for a second day of losses against New Zealand’s currency before a U.S. report that economists said will show factory orders rebounded in September, spurring investors to buy higher-yielding assets. The dollar fell on speculation the Federal Reserve will this week keep interest rates near zero and refrain from signaling a withdrawal of stimulus measures. Australia’s dollar erased gains after the central bank raised borrowing costs by 0.25 percentage point.

“Risk-taking appetite is returning, given that economies are improving,” said Norifumi Yoshida, vice president of the trading section at Mizuho Corporate Bank Ltd. in Singapore. “The yen is being sold.”

The yen dropped to 65.13 per New Zealand dollar as of 6:49 a.m. in London from 64.79 in New York yesterday. Japan’s currency declined to 11.4220 per South African rand from 11.3280. It slipped to 133.45 per euro from 133.32, and was at 90.18 versus the greenback from 90.21.

The dollar declined to $1.4797 per euro from $1.4775, and weakened to 72.22 cents per New Zealand dollar from 71.82 cents.

Fed Statement

The dollar weakened before the Fed releases its monetary policy statement tomorrow at the conclusion of its rate meeting. The central bank in its previous meeting retained a commitment to keep borrowing costs near zero for an “extended period.”

The U.S. banking system is still “far from robust,” hurt by a decline in commercial real-estate values and threatened by rising prospects for defaults on such loans, Jon Greenlee, associate director of the Fed’s Division of Banking Supervision and Regulation in Washington, said yesterday in testimony to a House Oversight subcommittee hearing in Atlanta.

“The Fed is unlikely to revise the ‘extended period’ language, given the fragile economic recovery,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s biggest bank. “The dollar is a favored funding currency globally, so its weakening trend is likely to persist.”

U.S. factory orders climbed 0.8 percent in September after a 0.8 percent decline in August, according to a Bloomberg News survey of economists before the Commerce Department releases the report in Washington today.

Australian Dollar

The Australian dollar erased its advance versus the U.S. currency after the central bank raised interest rates by 0.25 percentage point as economists had forecast. The Reserve Bank of Australia said it was “prudent to lessen gradually” the stimulus to the economy provided by low borrowing costs.

“There was some guidance given, but not strong guidance, on future decisions but we do expect further rate increases to come from the central bank,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia. “Any pullback in the currency would be a buying opportunity.”

Eighteen of 22 economists surveyed by Bloomberg News had predicted the Reserve Bank would increase the overnight cash rate target by a quarter percentage point.

Australia’s dollar traded at 90.30 U.S. cents from 90.40 cents in New York, after earlier rising as much as 0.6 percent. The currency was at 81.44 yen from 81.54 yen.

Benchmark interest rates are 3.5 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Pound Falls

The pound declined for a second day against the euro on speculation the Bank of England will this week extend its asset- buying program.

Bank of England policy makers will decide to expand bond purchases by 50 billion pounds ($82 billion) to 225 billion pounds at their Nov. 5 meeting, a Bloomberg survey of economists showed. That would be the third increase since the program started in March.

“There is a bit of a possibility that the Bank of England could increase the size of the quantitative-easing program, making them the most dovish central bank of all the major central banks,” said Kathy Lien, head of foreign-exchange research in New York at online currency-trading firm GFT Forex, in a Bloomberg Television interview. “That’s probably the reason the pound is falling and could continue to fall on the heels of the rate decision.”

The pound dropped to 90.34 pence per euro from 90.05 pence in New York yesterday. It was at $1.6379 from $1.6408.


Source: bloomberg.com

Publication date: 11/3/2009

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