By Stanley White
Dec. 19 (Bloomberg) -- The dollar headed for a seventh weekly decline versus the yen after the Federal Reserve introduced near-zero interest rates and said it would focus on buying debt to combat a global recession.
The dollar was also poised for its biggest weekly loss against the euro since the 15-nation currency’s 1999 debut as the Fed’s rate cut sent Treasury yields to record lows, reducing the appeal of U.S. assets. The yen, which reached a 13-year high against the dollar this week, briefly pared gains today after the Bank of Japan lowered its benchmark rate to 0.1 percent from 0.3 percent and said it would buy commercial paper to boost corporate lending.
“The Fed has taken very aggressive measures, and some people take this as a sign of how serious the problem is,” said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world’s largest money manager for institutions. “The mood is dollar selling. There’s no way to change that over the next few weeks.”
The dollar fell to 89.18 yen as of 7:30 a.m. in London from 89.43 yen late yesterday in New York, on course for a 2.3 percent decline this week. It dropped to 87.14 yen on Dec. 17, the lowest level since 1995. The dollar traded at $1.4239 versus the euro from $1.4240 yesterday, when it slumped to an 11-week low of $1.4719. The euro fell to 127.10 yen from 127.44 yen. The dollar may decline to 87 yen in the next few weeks, Tomita said.
Weekly Loss
The dollar headed for a 6.2 percent decline against the euro this week after the U.S. central bank lowered the fed funds target on Dec. 16 to a range of zero to 0.25 percent, the lowest among major economies. The Fed reiterated plans to purchase agency debt and mortgage-backed securities and said it will study buying U.S. government debt.
The U.S. currency gained 2.5 percent against the euro this year, 32 percent versus the British pound and 28 percent against the Australian dollar as investors bought the greenback to flee riskier assets and repay dollar-denominated loans from lenders reining in credit.
Treasuries rallied yesterday, pushing yields on 10- and 30- year securities to record lows as demand for the safety of principal outweighed prospects for record debt sales. U.S. government debt is headed for its best year since 1995, according to Merrill Lynch & Co. indexes.
BOJ Policy
The BOJ said today it will raise monthly government bond purchases to 1.4 trillion yen ($15.7 billion) from 1.2 trillion yen in order increase liquidity in the financial system.
“The BOJ has done what’s necessary given the state of the global economy,” said Masahiro Sato, joint general manager of the treasury division in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest publicly listed lender. “The size of the BOJ’s rate cut may not be enough to impact the yen.”
Japan’s currency has appreciated 25 percent against the dollar 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.
The yen fell against the dollar and euro yesterday as Japan’s government signaled it may intervene in the foreign- exchange market for the first time in four years.
Finance Minister Shoichi Nakagawa said at a news conference in Tokyo that he has “the means” to limit the yen’s rally. Central banks buy or sell currencies when they seek to influence exchange rates.
Currency Intervention
“In the near term, the BOJ rate cut may lower the chance of intervention, because upward pressure on the yen would have increased had they done nothing,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Plc in Tokyo and a former BOJ currency trader. “Over the longer term, should the yen start rising again, then intervention becomes more likely.”
Honda Motor Co. President Takeo Fukui described the yen’s level earlier this week as “abnormal” and called on the government and central bank to take “swift action.” Japan’s second-largest automaker cut its full-year profit forecast by 62 percent, citing a surging yen and falling sales in North America and Europe.
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 strengthened to 103.42 per dollar. Japan hasn’t bought yen since 1998, when it spent 3.05 trillion yen as the currency reached a low of 147.66.
The pound was quoted at 94.45 pence per euro from 94.88. It fell yesterday to a record low of 95.57 pence for the first time on speculation the Bank of England may follow the Fed in cutting the target lending rate to near zero. Sterling bought $1.5119 from $1.5015.
“We expect further economic weakness in the U.K.,” Brian Kim, a Stamford, Connecticut-based currency strategist at UBS AG wrote in a research note yesterday. “While fiscal and monetary stimulus will likely help combat the slowdown, we still target the pound at $1.45 in the next three months.”
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net.
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