By Jamie McGee and Michael J. Moore
Dec. 18 (Bloomberg) -- The yen fell from near a 13-year high against the dollar and tumbled versus the euro after Japan’s government signaled it may intervene in the foreign- exchange market for the first time in four years.
Finance Minister Shoichi Nakagawa said he has “the means” to limit the yen’s advance, which undermines Japanese exporters by raising prices for overseas customers. The dollar erased its annual gain against the euro on bets the Federal Reserve’s near- zero interest-rate policy will reduce the appeal of U.S. assets. The pound tumbled to a record against the euro for a ninth day.
“The rhetoric from Japan picked up in a fairly significant way in the past 24 hours,” said Jim McCormick, London-based global head of foreign-exchange and local-markets strategy at Citigroup Inc., in an interview on Bloomberg Radio. “If you’re going to intervene, why not do it in what is probably going to be one of the most illiquid periods of what has been a pretty illiquid year, which is the time between now and the end of the year.”
The yen fell 1.5 percent to 88.52 per dollar at 9:11 a.m. in New York, from 87.24 yesterday, when it reached 87.14, the highest level since July 1995. The euro increased 2.2 percent to 128.62 yen from 125.80 yesterday. The dollar dropped 0.8 percent to $1.4529 per euro from $1.4419, weakening beyond $1.47 for the first time since Sept. 25.
The dollar depreciated 21 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.
‘Keenly Watching’
Nakagawa is “keenly watching” developments in foreign- exchange and other financial markets as well as the economy, he said at a news conference in Tokyo. “I’m going to refrain from saying now whether we’ll intervene or not, but I have the means,” the finance minister said.
Japan may step into foreign-exchange markets following the yen’s recent gains, Chief Cabinet Secretary Takeo Kawamura said today in Tokyo. The government expects the Bank of Japan to respond appropriately to the yen, he said. Central banks buy or sell currencies when they seek to influence exchange rates. The yen gained 26 percent versus the dollar this year.
Honda Motor Co., Japan’s second-largest automaker, cut its full-year profit forecast this week by 62 percent, citing a surging yen and falling sales in North America and Europe.
Yen Interventions
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 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.
Japan may struggle to reverse the yen’s advance, according to JPMorgan Chase & Co.
“Even if Japanese Ministry of Finance intervenes in the dollar-yen market, the impact should be limited and short- lived,” analysts including Holly Huffman in New York, Kamal Sharma in London and Tohru Sasaki in Tokyo wrote in a report today. “Japan cannot afford to conduct massive” amounts of sales, they said.
The dollar declined against the euro on speculation the Fed has fewer tools left to combat a recession. The central bank lowered its target rate for overnight lending on Dec. 16 to a range of zero to 0.25 percent, the lowest among major economies, from 1 percent. The central bank reiterated plans to purchase agency debt and mortgage-backed securities and said it will study buying Treasuries.
Treasury Yields
Ten-year Treasury yields touched 2.0711 percent yesterday, the lowest level ever.
“Further destruction in U.S. yields is single-handedly reversing the benefits of previous U.S. dollar safe-haven properties,” Standard Chartered Plc analysts led by Callum Henderson in Singapore wrote in a report today. “Unless other G-7 central banks, with the exception of Japan, the original merchant of zero rates, follow in the Fed’s footsteps, rate differentials will weigh heavily on the U.S. dollar for quite some time.”
Standard Chartered cut its dollar forecasts today. The U.S. currency will end the first quarter at $1.50 per euro and 75 yen. Its previous predictions were $1.20 and 95 yen.
The pound weakened beyond 95 pence per euro for the first time on speculation the Bank of England may follow the Fed in cutting the target lending rate to near zero. Sterling later dropped 2.2 percent to 94.86 pence and 1.2 percent to $1.5357.
Stark on Inflation
The euro also rose after European Central Bank Executive Board member Juergen Stark, speaking in a Manager magazine interview, underscored the threat of inflation from expansive monetary policies. The ECB reduced its main refinancing rate three times since the end of September, lowering it to 2.5 percent from 4.25 percent to contain the fallout from the global financial crisis.
“The very strong euro is related to the dichotomy between the paths the Fed and ECB are taking,” said Steven Barrow, head of G-10 currency research in London at Standard Bank Plc. “The ECB is out on a limb with respect to the rest of the world on rates and that’s what’s creating this strength.”
There’s 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 using overnight interest-rate swaps.
“The Bank of Japan is set to cut rates to 0.15 percent overnight and open the door to quantitative easing,” wrote Fiona Lake, a Hong Kong-based analyst at Goldman Sachs Group Inc., in a note to clients. “Contrary to history, the yen is likely to benefit given the Bank of Japan’s experience with this policy framework compared to elsewhere.”
To contact the reporters on this story: Jamie McGee in New York at jmcgee8@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net
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