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Yen's Decline to 100 Versus Dollar Is Unlikely, Options Trading Indicates

Further decline in the yen following the resignation of Japan’s Prime Minister Yukio Hatoyama may be limited, implied volatility from options trading monitored by Bloomberg show.

The likelihood the currency will weaken to 100 against the dollar in a month was 3.4 percent at 2 p.m. in New York. The odds increased to 22 percent for a three-month period and 42 percent by year-end.

Japan’s currency dropped today as much as 1.5 percent to 92.36 versus the dollar in the biggest intraday decrease since May 10 on speculation Hatoyama’s successor will pursue policies that weaken Japan’s currency. Finance Minister Naoto Kan has called for the Bank of Japan to do more to fight deflation.

“You get the feeling the last few months a lot of the bears have thrown in the towel,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said in a telephone interview. “There’s a huge amount of negativity around the currency year after year.” He maintains that the yen will weaken to 100 as soon as this month.

The yen will decline to 100 by the end of the first quarter of 2011, according to median forecast of 39 economists in a Bloomberg News survey. Japan’s currency last traded at that level in April 2009.

Japan’s currency will slide to 100 as soon as this month as economic growth prospects make it more likely that the Federal Reserve will increase borrowing costs before the Bank of Japan, according to Franulovich.

‘Unbearable’ Debt

“I’m not bearish on the yen just because the prime minister has had to step down -- that’s not what bothers me,” Franulovich said. “It’s the bigger-picture story of an unbearable government debt load, one that will be increasingly difficult to finance. It’s a fundamentally flawed currency.”

Japan’s public debt is approaching 200 percent of gross domestic product, the biggest among the 31-member Organization for Economic Cooperation and Development in Paris.

The yen climbed 2.8 percent against the dollar last month as Europe’s sovereign-debt crisis encouraged investors to reduce carry trades, in which they buy higher-yielding assets with amounts borrowed in nations with low interest rates. Japan’s target lending rate of 0.1 percent has made the yen popular for funding such transactions.

“The yen performed well in May amid financial turmoil, but we do not expect the winning streak to continue,” John Hydeskov, a Copenhagen-based analyst at Danske Bank A/S, wrote today in a research note. “Heightened political uncertainty and postponed plans to reduce the public debt could contribute to further yen weakness in the coming months,” wrote Hydeskov, referring to Japan.

Hydeskov recommended buying the dollar at 91.60 yen with a target of 94.60 before the U.S. payrolls report due from the Labor Department on June 4.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

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