The yen strengthened, paring weekly declines against most major peers, as Asian stocks declined before upper-house elections of Japan’s parliament on July 21.
The extra yield that investors receive from holding U.S. Treasuries instead of Japan’s government bonds fell from a two-year high, reducing the appeal of the dollar. Indonesia’s rupiah weakened for a record 11th day as the central bank manages a gradual depreciation of the onshore exchange rate toward offshore levels. JPMorgan Chase & Co.’s Global FX Volatility Index slid to a seven-week low.
“It’s perhaps more of end-of-the-week profit taking, given that narrowing interest-rate differentials do not justify a higher dollar-yen,” said Roy Teo, a currency strategist at ABN Amro Bank NV in Singapore. “During summer holidays, you may see a bit more volatile moves” owing to thin liquidity, he said.
The yen appreciated 0.1 percent to 100.29 per dollar as of 8:41 a.m. in London, trimming its weekly slide to 0.9 percent. It was little changed at 131.68 per euro, having lost 1.6 percent since July 12. The dollar slid 0.2 percent to $1.3131 per euro, extending its weekly decline to 0.5 percent.
The MSCI Asia Pacific Index of shares fell for a third day, losing 0.5 percent.
The yen weakened as much as 0.4 percent against the greenback earlier as government data showed that Japanese investors bought a net 1.11 trillion yen of foreign bonds last week. That’s the most since the period ended Sept. 28.
The yield spread between Treasury 10-year notes and similar-maturity Japanese government bonds narrowed to 1.70 percentage points. It reached 1.88 percentage points on July 5, the most since July 2011.
The Bank of Japan doubled monthly purchases of JGBs to more than 7 trillion yen in April after Prime Minister Shinzo Abe urged the central bank to take steps to overcome deflation.
Abe’s Liberal Democratic Party and its coalition partner New Komeito are on track to win more than 65 of the 121 upper house seats being contested, according to a poll published in the Nikkei newspaper on July 17. A victory in the vote will give the parties control of both chambers of parliament, strengthening the prime minister’s ability to carry out a three-pronged plan of monetary easing, fiscal stimulus and deregulation known as Abenomics.
“The three arrows of Abenomics have clearly gained traction in popularity, and one of the arrows is easy monetary conditions contributing to a weaker yen,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore. A positive outcome for Abe will help him push through further easing that contrasts with “a stronger U.S. economy and tapering of their quantitative policy measures.”
The yen erased its decline as Japanese stock futures slid and Koichi Hamada, an adviser to Abe, said the nation’s consumption tax must be raised “at some point.”
Hedge-fund selling of Nikkei 225 Stock Average futures prompted a drop in the dollar against the yen, according to a foreign-exchange trader, who asked not to be identified because he isn’t authorized to speak publicly. The contracts dropped as much as 2.6 percent.
A “strong uptick” in Japanese buying of foreign bonds initially buoyed the dollar-yen rate, said Jonathan Cavenagh, a Singapore-based currency strategist at Westpac Banking Corp. “Then, we saw the Japanese equity market sentiment roll over, and that took dollar-yen down with it.”
The Bloomberg Dollar Index, which tracks the greenback against 10 other major currencies, retreated 0.2 percent to 1,032.66, having lost 0.5 percent this week.
Federal Reserve Chairman Ben S. Bernanke told the Senate Banking Committee yesterday it was “way too early to make any judgment” as to whether tapering will start in September. He delivered his semi-annual report on monetary policy to the panel after telling the House Financial Services Committee the prior day he’ll take a wait-and-see stance on stimulus.
The U.S. central bank buys $85 billion of Treasuries and mortgage debt each month as part of its third round of quantitative-easing stimulus to cap borrowing costs, a program that tends to debase the currency. Bernanke said last month the purchases may slow this year and stop in the middle of next year if economic growth meets policy makers’ projections.
JPMorgan Chase & Co.’s Global FX Volatility Index, a measure of currency fluctuations, declined to 9.85, the lowest since May 29. It touched a one-year intraday high of 11.96 percent on June 24.
The rupiah dropped 0.2 percent to 10,080 per dollar, after touching 10,126, the weakest since September 2009, according to prices from local banks compiled by Bloomberg.
“We expect pressure on the spot rate to continue,” said Thio Chin Loo, senior currency analyst at BNP Paribas SA in Singapore. “Bank Indonesia is releasing its hold because draining the reserves is uncomfortable for them, so this allows pent-up dollar demand to go through.”
Bank Indonesia Deputy Governor Perry Warjiyo said last week that the monetary authority has supplied dollars to the market in the past two to three months while allowing the rupiah to slowly retreat.