Yen Rallies From 7-Month Low as BOJ Refrains From Easing

The yen rallied from near its weakest level in almost seven months against the dollar after Bank of Japan (8301) Governor Masaaki Shirakawa said the opposition party’s proposals to weaken the currency are unrealistic.

The Japanese currency rose versus most of its 16 major counterparts as the BOJ refrained from adding to stimulus measures. Shinzo Abe, favored to topple Japan’s prime minister in Dec. 16 elections, has advocated unlimited easing. The euro weakened against the pound after Moody’s Investors Service cut France’s top rating, renewing concern that Europe’s debt crisis will deepen.

“Shirakawa is being cautious, pouring some cold water on some of the ideas that have been put out by the opposition,” said Derek Halpenny, European head of global-markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “It’s a reason to pare short positions on the yen.” A short position is a bet that an asset will fall in price.

The yen climbed 0.2 percent to 81.28 per dollar at 11 a.m. London time. It touched 81.59 yesterday, the weakest level since April 25. Japan’s currency rose 0.2 percent to 104.10 per euro. Europe’s currency was little changed at $1.2807.

The pound appreciated 0.2 percent to 80.43 pence per euro, after depreciating to 80.65 pence on Nov. 15, the weakest since Oct. 31.

The yen will strengthen toward 79 per dollar within the next six weeks, amid demand for the safest assets, Halpenny forecast.

BOJ Independence

Shirakawa told reporters in Tokyo he wants people to respect the BOJ’s independence and that unlimited money printing would be damaging. He spoke after the central bank said it would keep its asset fund at 66 trillion yen and a credit-lending facility unchanged at 25 trillion yen. All of 22 economists surveyed by Bloomberg News had forecast no change.

Abe, leader of Japan’s Liberal Democratic Party, has advocated an increase in the central bank’s inflation goal to as much as 3 percent from 1 percent. The BOJ is scheduled to hold a policy meeting three days after the election, with 16 economists forecasting easing.

“The markets are pausing for breath in dollar-yen,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore. “They’re now thinking about the election, who’s likely to win it and what form the next government would take.”

Dollar-Yen Overdone

The 14-day relative strength index for the dollar against the Japanese currency rose to 71 yesterday, above the 70 level that some traders see as a sign an asset’s move may change direction.

“The move looks a bit overdone,” Mitul Kotecha, Hong Kong-based head of currency strategy at Credit Agricole SA (ACA), said in an interview on Bloomberg Television. “I don’t think we’re going to see a quick move up to 85.”

The yen has declined 3.7 percent over the past three months, the biggest decline among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has gained 2.9 percent, while the dollar has dropped 1.2 percent.

Moody’s cut France by one grade to Aa1 from Aaa late yesterday and said the nation’s outlook remains negative “as a result of its deteriorating economic prospects.”

The move follows similar action by Standard & Poor’s in January. Since S&P’s rating action, French government bonds have returned 9.4 percent, compared with 3.4 percent for German debt, and 2.5 percent for that of the U.S., according to Bank of America Merrill Lynch data.

‘Kneejerk Reaction’

“There is probably more downside ’til the kneejerk reaction is out of the way,” Steven Englander, Citigroup Inc.’s New York-based global head of Group of 10 strategy wrote of the euro in an e-mail to clients. “On the whole, it seems likely that this more reflects an already existing reality than new information for the market, so the downside should be relatively limited.”

Europe’s shared currency may slide as it trades near the so-called neck line of an M-shaped trading pattern known as a double-top formation, according to Brown Brothers Harriman & Co.

The euro may drop toward $1.2450 as it trades near $1.28, the neck line between a high of $1.3172 on Sept. 17 and a peak of $1.3140 on Oct. 17, Marc Chandler, New York-based global head of currency strategy at BBH, wrote in an e-mailed note to clients yesterday. The $1.2450 level was last seen on Aug. 22, when it dipped to as low as $1.2431.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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