Dollar Falls Most Against Yen in Month on Fed Rate Outlook

The dollar dropped the most versus the yen in a month as traders pared bets that the Federal Reserve will increase its target lending rate, making U.S. assets less attractive.
The yen gained this week versus all of its major counterparts, rallying against Sweden’s krona and Brazil’s real as the Bank of Japan raised its assessment of the economy for a second month. The dollar weakened as Fed officials considered using their June 24 policy statement to suppress speculation they’re prepared to raise interest rates as soon as this year.
“The Fed will try to tell the market that they won’t withdraw monetary stimulus unless they see a sustained recovery,” said Alan Kabbani, a senior currency trader at Wachovia Corp. in Charlotte, North Carolina.
The dollar fell 2.2 percent this week to 96.27 yen, from 98.43 yen on June 12. It was the biggest decrease since the five days ended May 15, when the greenback slid 3.3 percent. The yen gained 2.7 percent to 134.18 per euro from 137.89 a week earlier. The dollar appreciated 0.6 percent to $1.3937 versus the euro from $1.4016.
Interest-rate futures indicated a 44 percent chance the central bank will boost its target rate to at least 0.5 percent by December, down from 55 percent odds a week ago.
Fed staff examined the Bank of Canada’s public intention of forgoing an increase until 2010 without concluding the statement proved effective, said a person familiar with the matter.
The greenback will remain “on defensive” before the Federal Open Market Committee’s policy meeting next week, wrote Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London, in a research note yesterday.
‘Bearish Development’
“It is notable that between August 2003 to January 2004, when the Fed committed to maintaining policy accommodation for a ‘considerable’ period, the Dollar Index trended lower,” wrote Hardman. “We believe that the adoption of a similar approach by the FOMC next week to dampen tightening expectations before year-end will ultimately prove a similarly bearish development for the dollar this time around.”
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, lost almost 10 percent from August 2003 to January 2004. The gauge of the dollar increased 0.2 percent to 80.264 this week.
The yen gained 4.9 percent to 12.18 versus the krona and 4.5 percent to 48.86 against the real as the Bank of Japan said this week the world’s second-largest economy has “begun to stop worsening.”
BOJ’s Target Rate
Speculation the worst is over doesn’t mean the Bank of Japan is preparing to raise the key overnight lending rate, which stayed at 0.1 percent after this week’s meeting.
The Bank of Japan should consider whether to stop pumping extra cash into the banking system by evaluating trends in corporate financing and the economy, some policy board members said last month.
They said whether to keep buying corporate debt from banks and providing them with unlimited loans after Sept. 30 “should be determined based on close examination of developments in financial markets and corporate financing,” according to minutes of the May 20-21 meeting published in Tokyo yesterday.
Brazil, China, Russia and India said in a joint statement on June 16 after conducting a summit, in Yekaterinburg, Russia, that emerging economies should have a “greater voice and representation in international financial institutions.”
The first BRIC summit was held after the nations announced plans in recent weeks to shift some foreign reserves into International Monetary Fund bonds, causing the dollar and U.S. Treasuries to fall. The BRIC nations have combined reserves of $2.8 trillion and are among the biggest holders of U.S. government debt.
Aussie Versus Yen
The Australian dollar increased 0.6 percent to 77.48 yen and the New Zealand currency advanced 1 percent to 61.96 yen yesterday as bets the global recession is easing prompted investors to sell assets where interest rates are low and buy where returns are higher. The gains pared the Aussie’s weekly loss to 3.1 percent and the kiwi’s to 2.1 percent.
The Fed’s target lending rate of zero to 0.25 percent and the Bank of Japan’s benchmark compare with 3 percent in Australia and 2.5 percent in New Zealand.
European Union leaders saw the first signs of a “sustainable” economic recovery, making additional stimulus unnecessary, according to a statement from yesterday’s summit in Brussels. The World Bank raised on the previous day its growth forecast for China this year.
‘Positive’ Picture
“The broader picture is turning more positive, and risk appetite is returning,” said Ian Stannard a foreign-exchange strategist in London at BNP Paribas SA. “This is providing support for the pro-cyclical currencies such as the Australian dollar, while the yen is coming under pressure.”
Chile’s peso was the biggest winner against the dollar among all of the world’s currencies after the government announced plans to extend its dollar sales in the foreign- exchange market to fund an additional $4 billion in stimulus spending.
The peso jumped 5.1 percent this week to 535.75 per dollar, its biggest gain since February. It advanced to 534.70 yesterday, the strongest level since Sept. 24.