Dollar May Fall to 87 Yen as Recovery Gathers Pace, Nomura Says

By Shigeki Nozawa

May 28 (Bloomberg) -- The dollar may fall as low as 87 yen in a year as a global economic recovery led by China and India spurs investors to cut holdings of the U.S. currency, according to Nomura Securities Co.

Banks across the world reacted to the worldwide recession by amassing dollars and they are now looking to shift those funds to emerging-market stocks and commodities, said Taisuke Tanaka, a foreign-currency strategist in Tokyo at Nomura Securities, a unit of Japan’s biggest brokerage. The dollar may also weaken as the Federal Reserve adds extra funds to its financial system to combat the recession, he said.

“Increasing expectations that the global economy will recover and the ‘punish-the-printers’ trade will push down the dollar and benefit the yen,” Tanaka said. The yen will strengthen to 90 per dollar by the end of March and reach 87 three months later, he said.

China’s 4 trillion yuan ($586 billion) stimulus package is sparking signs of a government-led recovery in the world’s third-biggest economy. Urban fixed-asset investment climbed 30.5 percent in the first four months of 2009 from a year earlier, and imports from the U.S. posted the biggest back-to-back gain in three years.

The Japanese government raised its assessment of its economy last week for the first time in three years on signs the worst of the recession may be over.

The Dollar Index, used by the Intercontinental Exchange Inc. to track the greenback against the euro, yen, pound, Swiss Franc, Canadian dollar and Swedish krona, slid to a five-month low of 79.805 on May 22, and the dollar hit its three-month low of 93.86 yen the same day. The U.S. currency traded at 95.91 yen as of 11:21 a.m. in Tokyo.

Fed’s Balance Sheet

Should the Fed begin to reduce the amount of money it pumps into the financial system through so-called quantitative easing too early, overseas investors will grow increasingly reluctant to buy U.S. stocks and bonds due to concerns about a “liquidity shock,” Tanaka said.

The size of the Fed’s balance sheet increased to $2.18 trillion yen on May 20, from $900 billion before the collapse of Lehman Brothers Holdings Inc. in September.

To contact the reporter on this story: Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net.