Yen Will Weaken to Five-Month Low Against Dollar, Goldman Says

By Candice Zachariahs

March 12 (Bloomberg) -- The yen will fall to a five-month low versus the dollar and weaken against the euro as Japan’s currency loses its appeal as a refuge and the economy contracts 6.1 percent, Goldman Sachs Group Inc. said.

The currency will decline 7.2 percent to 105 per U.S. dollar and weaken by 8.5 percent to 136.5 per euro, the bank said, revising earlier three-month forecasts for 90 and 117, respectively. The yen rose to 87.13 per dollar on Jan. 21, the strongest since 1995, as pressure to repay low-cost loans in Japan that had funded higher-yielding investments escalated after the collapse of Lehman Brothers Holdings Inc. in September.

“In the near-term, the risks are still skewed towards further yen weakness beyond our new three-month forecast of dollar-yen,” a team of Goldman Sachs analysts led by Thomas Stolper in London wrote in a note yesterday. “In conjunction with doubts about whether or not the correlation between the yen and equity markets would be maintained, the macro data has provided evidence that the Japanese economy contracted sharply at the end of last year.”

The yen will trade at 100 per dollar in six and 12 months versus earlier expectations for it to strengthen to 90, Goldman Sachs said. Against the euro, the currency will trade at 140 yen and 145 yen in six months and one year, the analysts wrote.

The yen fell 0.1 percent to 97.37 per dollar as of 8:21 a.m. in Tokyo and was little changed at 124.85 per euro, compared with late yesterday in New York. It last traded at weaker than 105 against the dollar on Oct. 6.

Japan’s currency was the best performing of the 16 most- traded currencies against the greenback last year. It has fallen against eight of the 16 since the start of 2009.

Economy Shrinking

The world’s second-largest economy shrank at an annual 12.7 percent pace in the fourth quarter, the most since the 1974 oil shock, as recessions in the U.S. and Europe triggered a record drop in exports.

Expectations for the yen to strengthen in the next six months plunged after Japan’s economy contracted last quarter, a survey of Bloomberg users showed.

“Given the macro backdrop, there is little doubt that a 14 percent overvalued yen versus the dollar is a challenge for exporters in particular,” the Goldman analysts wrote. “Purely on the basis of financial conditions, therefore, we see a risk that the yen converges faster to fair value,” in the area of 115 yen per dollar, the bank said.

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