Yen Strengthens as Fed Easing Debate Intensifies; Aussie Slides

The yen strengthened versus the dollar and euro as speculation intensifies about Federal Reserve’s path of monetary stimulus.

Japan’s currency rallied against all 31 of its most-traded counterparts as Prime Minister Shinzo Abe failed to provide additional detail on stimulus measures. Australia’s dollar fell after the nation’s gross domestic product grew at the slowest pace in almost two years. Federal Reserve Bank of Dallas President Richard Fisher called for a reduction in the central bank’s $85 billion in monthly asset purchases. A volatility measure of Group-of-Seven currencies approached the highest since February.

“People have been backing off their weaker yen view, at least for now,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview. “We’ve seen this over the last couple of months where it’s been maybe a 2, 3 percent retracement lower in dollar-yen before it goes higher.”

The yen advanced 1 percent to 99.06 per dollar as of 5 p.m. in New York after reaching 98.87 on June 3, the strongest since May 9. Japan’s currency appreciated 0.9 percent to 129.70 per euro. Europe’s shared currency rose 0.1 percent to $1.3093.

The South African rand declined versus all 31 of its most-traded counterparts after Reserve Bank Governor Gill Marcus said price stability remains the central bank’s primary focus even as growth slows. The currency fell 1.9 percent to 10.0073.

Topix Decline

Poland’s currency fell as its central bank cut borrowing costs to a record low as the European Union’s largest eastern economy grapples with its worst slowdown in four years.

The zloty lost 1.1 percent to 4.2845 per euro.

Japan’s currency gained after the Topix index of shares closed down 3.2 percent. Abe said a legislative campaign to loosen rules on businesses won’t begin for months as he outlined his “third arrow” of an economic revival plan that seeks to build on fiscal and monetary stimulus.

“There’s general disappointment that Abe didn’t announce anything that was surprising or new,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “There’s some disappointment in Japanese stocks and that’s pushing the yen up. The Aussie is likely to remain pressured after the GDP (AUNAGDPC) data.”

Yen Path

The yen depreciated to 103.74 per dollar on May 22, the weakest since October 2008, after the Bank of Japan announced in April it will buy more than 7 trillion yen ($70 billion) of bonds every month.

“I don’t think you can safely conclude that dollar-yen has peaked,” Adam Cole, the head of G-10 currency strategy at Royal Bank of Canada in London, said in a telephone interview. “I do have a slightly off-consensus view that it does roll over.”

JPMorgan Chase & Co.’s Group-of-Seven Volatility Index, based on currency option premiums, touched 10.2 percent after reaching 10.24 percent on May 31 and June 3, the highest level since Feb. 26.

The euro-area economy shrank 0.2 percent in the first quarter, in line with an initial estimate on May 15, the EU’s statistics office in Luxembourg said today. The European Central Bank will announce any changes in policy tomorrow. The central bank cuts its benchmark interest-rate by 25 basis points, or 0.25 percentage point, to 0.5 percent on May 2.

Fed View

“This is the end of a 30-year rally” in bonds, Dallas Fed’s Fisher said yesterday to reporters after a speech in Toronto. “It would be prudent to dial back the rate of purchases we are making in mortgage-backed securities” now that “the housing market is in a good state, construction has started again, housing prices are appreciating significantly.”

Federal Reserve Bank of Kansas City President Esther George yesterday urged a reduction in the central bank’s bond-buying program, known as quantitative easing, as growth quickens. San Francisco Fed President John Williams said this week a “modest adjustment downward” in purchases is possible “as early as this summer.”

Companies in the U.S. boosted employment by 135,000 workers in May, figures from the Roseland, New Jersey-based ADP Research Institute showed today. The median forecast of 40 economists surveyed by Bloomberg called for an advance of 165,000.

The Fed is buying $85 billion of Treasury and mortgage bonds each month to put downward pressure on borrowing costs under its quantitative-easing stimulus strategy, which tends to debase the dollar. Market volatility has risen as traders speculate about a reduction in the stimulus measures.

Policy Review

“U.S. data surprises are now playing out through U.S. policy expectations,” said Cole of Royal Bank of Canada. “Weak data imply later tapering, and that’s the primary way the market is trading now rather than through risk appetite.”

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against currencies of six U.S. trading partners, dropped 0.3 percent to 82.547.

The Australian dollar weakened for a second day against the greenback after a report showed GDP grew 2.5 percent from a year earlier in the first quarter, boosting speculation the Reserve Bank will lower interest rates. That’s the slowest pace since the three months ended June 30, 2011, a statistics bureau report released in Sydney showed.

The Aussie fell 1.1 percent to 95.42 U.S. cents after dropping 1.2 percent yesterday. A measure of three-month volatility on the currency pair climbed to as much as 11.67 percent, the most since June 29, 2012.

The pound approached a three-week high against the dollar after a gauge based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply of purchasing managers in service industries rose to 54.9 last month, the highest reading since March 2012.

The pound gained 0.6 percent to $1.5406, touching the highest since May 10. Sterling strengthened 0.5 percent to 84.99 pence per euro.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net

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

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