Devaluations continue as Japan prepares to sell yen

By Stanley White
Bloomberg News
Thursday, December 18, 2008

http://www.bloomberg.com/apps/news?pid=20601087&sid=ar3TlpiLIzqY&refer=home

TOKYO -- The yen fell from near a 13-year high against the dollar after Japanese Finance Minister Shoichi Nakagawa signaled the nation is ready to sell the currency.

The yen also declined against the euro after Nakagawa told reporters that "we will take necessary steps if needed" to limit the currency's advance and protect the overseas earnings of Japanese exporters. The dollar fell to an 11-week low against the euro on speculation the Federal Reserve's near-zero interest rate policy will reduce the appeal of U.S. assets.

"We are at such high levels now that yen intervention becomes a possibility, and that's making some people nervous," said Saburo Matsumoto, senior manager of foreign-exchange sales at Sumitomo Trust & Banking Co. in Tokyo.

Japan's currency fell to 87.73 per dollar as of 1:49 p.m. in Tokyo from 87.24 yen yesterday in New York, when it reached 87.14, the highest level since July 1995. It declined to 126.60 per euro from 125.80 yesterday. The dollar was at $1.4432 per euro from $1.4419 after reaching an 11-week low of $1.4456. The yen may decline to 88 per dollar today, Matsumoto said.

Japan may intervene in foreign-exchange markets as the yen’s recent gains are abnormal, Chief Cabinet Secretary Takeo Kawamura also said today in Tokyo. The government expects the Bank of Japan to respond appropriately to the yen, he said. Central banks intervene when they buy or sell currencies to influence their exchange rates.

Against the Australian dollar, the yen fell to 61.79 from 61.40 late yesterday in New York. It also declined to 52.02 per New Zealand dollar from 51.70, and to 8.9348 versus the South African rand from 8.8879.

The yen also slid toward a five-week low against the euro as gains in Japanese stocks gave investors more confidence to purchase higher-yielding assets. The Nikkei 225 Stock Average advanced 0.3 percent, after earlier falling as much as 0.9 percent. Japan's benchmark interest rate of 0.3 percent compares with 4.25 percent in Australia, 5 percent in New Zealand and 11.5 percent in South Africa.

Honda Motor Co., Japan's second-largest automaker, yesterday cut its operating profit forecast for the current financial year for a third time, lowering the estimate to 180 billion yen ($2.05 billion) from 550 billion yen as currency gains erode overseas earnings.

The last time Japan intervened on its own, it sold a record 20.4 trillion yen in 2003 and 14.8 trillion yen in the first quarter of 2004, when the yen rose as high as 103.42 per dollar. Japan hasn't bought yen since 1998, when it spent 3.05 trillion yen as the currency reached as low as 147.66.

The Group of Seven, which comprises the U.S., Japan, Germany, the U.K., France, Italy, and Canada, propped up the dollar in 1995, when it declined to a post-World War II low of 79.75 yen.

The greenback declined against the euro as longer-term Treasury yields fell and U.S. stocks declined on speculation the Fed has few tools left to combat a recession.

The yield on 10-year Treasuries fell two basis points, or 0.02 percentage point, today to 2.19 percent. It touched 2.0711 percent yesterday, the lowest level since the Fed’s daily data on the securities began in 1962. The Standard & Poor's 500 Index fell 1 percent.

The Fed lowered its target rate on Dec. 16 to a range of zero to 0.25 percent, from 1 percent, the lowest rate among major economies. The central bank reiterated plans to buy agency debt and mortgage-backed securities and said it will study buying Treasuries.

"The next step is for the Fed to start buying Treasuries, which will depress yields further and lead the dollar lower," said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. "The U.S. stock market shows few signs of life. I don't think people are waiting to buy the dollar on the cheap."

The dollar may fall to 85 yen next week, he said.

Investors should sell the U.S. dollar at 89 yen as it may decline to 83 yen, National Australia Bank Ltd. said. They should exit the trade if the greenback strengthens to 91 yen and watch for intervention in February and March if the currencies trade at 80 yen or below, Sydney-based John Kyriakopoulos, head of currency strategy at the bank, wrote in a note yesterday.

The U.S. federal budget deficit widened last month to $164.4 billion from $98.2 billion a year earlier, the Treasury Department reported last week.

"The U.S. dollar will find 2009 a tougher year thanks to the U.S. budget deficit climbing to at least $1 trillion at the same time that interest rates fall close to zero and the Federal Reserve ramps up quantitative easing," Kyriakopoulos said.

The U.S. currency will trade at 93 yen and $1.45 per euro by the end of 2009, the bank forecast.

The U.S. currency depreciated 22 percent against the yen this year, the most since 1987, as more than $1 trillion of credit-market losses sparked a seizure in money markets and threw the world’s largest economy into a recession.

A dollar turnaround could come as early as the first quarter of next year as other central banks lower their interest rates, according to Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.

There is a 54 percent chance BOJ policy makers will lower borrowing costs from 0.3 percent at a two-day meeting starting today, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

"I am not going to predetermine that measures should or shouldn’t be used," BoJ Governor Masaaki Shirakawa said on Dec. 16, when asked whether policy makers would consider reintroducing the 2001-2006 policy of pumping cash into the economy while holding borrowing costs near zero. The central bank will implement policy "appropriately," he said.

"The Fed remains ahead of the curve or more aggressive than most central banks with what it's doing with its monetary policy," said Bennenbroek, who forecast the euro will reach $1.45 and possibly $1.50 against the dollar. "Given how severe conditions are, a lot of other central banks are also very rapidly moving their interest rates down toward zero."

Gains in the euro may be limited by speculation a deteriorating economy will force the European Central Bank to lower interest rates and follow the Fed by adopting a quantitative easing policy.

The Ifo Institute will say its German business climate index fell to 84.0 this month, the lowest since February 1993, from 85.8 in November, according to a Bloomberg News survey. The data are due at 10 a.m. in Munich today. Germany is Europe's largest economy.

The ECB cut its benchmark interest rate to 2.5 percent from 3.25 percent on Dec. 4, the biggest reduction in its 10-year history.

"Eventually the ECB will have to react with more aggressive rate cuts, and even consider U.S.-style quantitative easing," analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note yesterday. "The slow pace of the policy response in Europe, both monetary and fiscal, will be unhelpful for the euro in the medium term."

The euro may decline to $1.1645 in the first half of next year, BNP Paribas forecast.

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