Gains in US dollar limited amid speculation US Fed will increase monetary stimulus next week
The yen retreated from near its postwar record against the dollar and the Swiss franc weakened amid speculation policy makers in both countries will seek to curb gains in their currencies that are hurting exporters.
The yen was set for its biggest drop in two weeks after Japanese Finance Minister Yoshihiko Noda said he’s ready to take decisive steps, after the currency reached 75.95 against the greenback on August 19. The euro fell versus most of its peers before a report tomorrow forecast to show European manufacturing contracted. Demand for the dollar was limited on prospects Federal Reserve Chairman Ben S Bernanke will signal this week an extension of monetary stimulus.
“The odds of Bank of Japan intervention definitely have increased this week,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd in Wellington. “At current levels, there’s certainly going to be a lot of angst in the Ministry of Finance, and the pressure will be on for them to intervene in the currency markets once again.”
The yen declined as low as to 77.21 per dollar before trading at 76.73 as of 2:10 pm in Tokyo from 76.55 on August 19 in New York. It was set for its biggest slide since August 4, the day Japan sold yen in foreign-exchange markets, its third such intervention in 12 months. Japan’s currency was at 110.21 per euro from 110.20.
The Swiss franc traded at 78.57 centimes against the dollar from 78.51 and was at 1.1288 per euro from 1.1303. The euro weakened to $1.4366 from $1.4397.
There were no signs that Japan’s intervened in markets on Monday, traders said. The yen slid to as low as 77.21 per dollar from 76.67 within one minute at about 11 am in Tokyo.
Noda told reporters in Tokyo on Monday he’s become “more concerned about the worsening of the yen’s one-sided movements,” and the government will take “bold actions if necessary and won’t rule out any possible options.”
Bank of Japan deputy governor Hirohide Yamaguchi said in Beijing on Sunday he was “worrying” about the yen’s gains, noting also that a stronger currency won’t “necessarily” damage the economy. The comments were clarified by a BOJ official in Tokyo, who said that while the deputy doesn’t see currency gains having a big effect on the economy immediately, he is concerned about what the effect may eventually be.
The franc weakened against 10 of its 16 major peers amid speculation the Swiss National Bank will introduce new measures to damp demand for Switzerland’s currency. The central bank, which earlier this month cut borrowing costs to zero and increased bank sight deposits almost sevenfold, left the door open for additional measures.
“Those are two currencies where authorities are actually intervening and looking to stop appreciation,” ANZ’s Goh said about the franc and yen. “The market is wary of any measures the SNB may take.”
The Swiss Cabinet expects the SNB to set an exchange-rate target of at least 1.20 francs per euro, SonntagsZeitung reported, without saying where it obtained the information.
The franc has advanced 11 percent over the past three months, the biggest gainer among 10 major-economy currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen has risen 5.1 percent and the dollar is down 2 percent.
The franc and yen tend to strengthen during periods of financial stress because their export-reliant economies don’t need foreign capital to balance current accounts - the broadest measure of trade.
The euro fell versus the greenback before Markit Economics in London announces a composite index based on a survey of euro-area purchasing managers in both services and manufacturing industries. The index fell to 50 in August from 51.1 in July, according to economists polled by Bloomberg News. A reading above 50 indicates growth. The manufacturing index will read 49.5, the survey showed.
“There is an ongoing slowdown in the euro area, particularly German growth, which has been very robust,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. “The problem with the euro-dollar is both the US and euro area have significant fundamental issues, so the euro-dollar exchange rate is trapped in a range.”
Standard Charted forecasts the euro to trade at $1.42 and $1.45 in the third and fourth quarter respectively.
Gains in the dollar were limited amid speculation Bernanke will signal that the Fed will increase monetary stimulus at an August 26 conference in Jackson Hole, Wyoming. The central bank bought $600 billion in Treasuries from November through June in a process known as quantitative easing or QE2.
The Fed said August 9 that US economic growth was “considerably slower” than anticipated and it’s prepared to use a range of policy tools to boost the economy. It pledged to keep interest rates near zero at least until mid-2013.
“The market focus is on Bernanke’s speech this week,” Junichi Ishikawa, a Tokyo-based market analyst at IG Markets Securities Ltd. wrote in a note to clients on Monday. “There may be increasing downward pressure for the dollar, should he mention the possibility of QE3.”