Yen Climbs Amid Speculation on Fed Stimulus; Aussie Dollar Drops

The yen rallied the most in a year against the dollar as speculation the U.S. Federal Reserve will reduce stimulus that has boosted global markets spurred declines in riskier assets that may have risen too far, too fast.

Japan’s currency climbed against all of its 16 most-traded peers this week as Fed officials gave conflicting signals on sustaining their bond buying, while Japanese policy makers kept their unprecedented stimulus in place. Stocks in Japan plunged. Australia’s dollar slid as data showed manufacturing contracted in China, the nation’s biggest trade partner. U.S. consumer spending stalled, a report next week may show.

“The correction in Japanese equities brought with it a correction in dollar-yen,” Robert Sinche, global strategist at Pierpont Securities in Stamford, Connecticut, said yesterday in a phone interview. “A lot of this was excess in markets looking for a reason to reverse. The yen was part of that process.”

The yen advanced 1.9 percent to 101.31 per dollar this week in New York, the biggest drop since the five days ended June 1, 2012. It had touched 103.74 on May 22, the weakest level since October 2008. Against the euro, the Japanese currency gained 1.1 percent to 131.01. The greenback dropped 0.7 percent against the euro to $1.2932, its first weekly decline since May 3.

Japan’s currency slid 17 percent in the past six months versus nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes as Prime Minister Shinzo Abe pledged to stem 15 years of deflation and the Bank of Japan doubled monthly bond purchases. The euro rose 4 percent, and the dollar appreciated 4.3 percent.

Net Shorts

Futures traders increased their bets to the most since July 2007 that the yen will fall against the dollar, data from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other big speculators on a decline in the yen versus those on a gain, known as net shorts, was 95,186 on May 21, compared with 88,407 a week earlier.

Traders increased wagers the pound will fall against the greenback to the most since at least 1992. Net-short bets totaled 76,976 on May 21, compared with 65,355 a week earlier.

South Africa’s rand and the Mexican peso were the biggest losers against the dollar this week. The rand dropped 1.8 percent on concern labor unrest will curb the nation’s growth, and the peso lost 1.5 percent amid bets the Fed will curtail stimulus, which has boosted emerging-market assets.

Aussie Falls

Australia’s currency lost for a third week as commodities slumped, with the Standard & Poor’s GSCI Index (SPGSCI) of 24 raw materials sinking 1.2 percent, and a gauge of Chinese factory output in May fell. The central bank cut its key interest rate on May 7 by a quarter-percentage point to 2.75 percent.

The Aussie dollar weakened 0.8 percent to 96.52 U.S. cents and touched 95.94 cents on May 23, the weakest since June 1.

Fed Chairman Ben S. Bernanke testified in Congress May 22 the U.S. central bank may decide at its next few meetings to slow bond purchases if it’s confident of sustained gains in the economy. At the same time, he said a premature tightening of monetary policy might imperil the economic recovery.

The Fed is buying $85 billion of Treasury and mortgage debt each month to cap borrowing costs, and has held its key interest rate at virtually zero since 2008 to support the economy.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against currencies of six major U.S. trading partners, rose on the day after Bernanke’s comments to 84.498, the highest since July 2010. Benchmark Treasury 10-year (USGG10YR) note yields climbed to 2.07 percent, a 10-week high.

Market Reaction

“While I’m personally a bit concerned the dollar might have run too far, too fast, that really depends how interest-rate markets react,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said yesterday in a telephone interview. “As expectations for tightening interest rates in the short term get priced in for the future, then that should push long-term interest rates higher.”

The JPMorgan G7 Volatility Index, based on three-month futures options on Group of Seven nations’ currencies, touched 10.1 percent on May 23, the most since Feb. 27. The average over the past year is 8.8 percent.

Markets tend to become more unstable as investors and traders try to assess the degree and timing of changes in U.S. central-bank stimulus, Pierpont’s Sinche said. “At turning points, there’s always more volatility,” he said.

Japanese Stocks

Japan’s Topix Index (TPX) of stocks plunged 6.9 percent May 23, the biggest drop since March 2011, after touching the highest since 2008. The gauge’s 14-day relative strength index had exceeded 70, the level some traders see as a signal an asset has increased too much, too quickly, every day since May 10. Ten-year Japanese government bond yields rose to 1 percent for the first time since April 2012.

Stocks pared losses and yields trimmed increases as BOJ Governor Haruhiko Kuroda said the central bank had announced sufficient monetary easing and will implement flexible money-market operations.

The euro gained as the Ifo institute’s German business-climate index improved to 105.7 from 104.4 in April. A Bloomberg survey had predicted it would remain unchanged. GfK AG said its consumer-sentiment index will increase to 6.5 next month from 6.2 in May. That would be the highest since September 2007.

While risks stemming from Europe’s debt crisis persist, the German economy, Europe’s biggest, will gather pace in the current quarter, the Bundesbank said this week.

Financial markets in the U.S. and U.K. will be shut for public holidays on May 27.

U.S. consumer spending was stagnant in April, economists surveyed by Bloomberg forecast before the Commerce Department reports the data on May 31. Spending rose 0.2 percent in March.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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