Dollar May Climb 12 Percent Versus Yen, Bank of America Says

By Candice Zachariahs

Nov. 18 (Bloomberg) -- The dollar may strengthen 12 percent against the yen by the end of June as expectations build that the Federal Reserve will start raising interest rates earlier than Japan's central bank, Bank of America Corp. said.

The Fed slashed its benchmark rate to 1 percent on Oct. 29 and the Bank of Japan lowered borrowing costs to 0.3 percent, the first reduction in seven years, two days later as policy makers tackled recessions stemming from seized global credit markets. The BOJ will reduce its rate to 0.1 percent, the lowest since July 2006, at a Dec. 19 meeting, Bank of America forecast.

``When the panic of the financial crisis is over, market participants will probably look for an eventual Fed tightening to reverse excessive easing earlier than the Bank of Japan,'' said Tokyo-based Tomoko Fujii, head of Japan economics and strategy at Bank of America, in a telephone interview.

The dollar will ``enter an upward trend'' from the second quarter, Fujii wrote in a research note dated yesterday. The currency will reach 105 yen by March 31, before strengthening to 108 in the second quarter and 112 by the end of 2009, she wrote.

The dollar gained for the first time in three days, trading at 96.73 yen as of 12:01 p.m. in Tokyo from 96.43 late yesterday in New York. The yen is the only one of the world's 16 most- active currencies to have strengthened versus the greenback over the past three months, rising 14 percent as investors sold higher-yielding overseas assets purchased with low-cost loans from Japan.

``While the yen remains vulnerable to risk appetite developments with high chances of temporary surges on position unwinds in the near term, the dollar-yen is likely to rise gradually in 2009,'' wrote Fujii. Bank of America is the third- biggest U.S. bank by market value.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net