Yen Falls Most Since 1979 as BOJ’s Kuroda Seeks to End Deflation

The yen plunged the most against the dollar last year since 1979 as Bank of Japan Governor Haruhiko Kuroda embarked on an unprecedented plan to boost economic growth and ward off 15 years of deflation.

The euro rose versus the greenback by the most since 2007 as the European Central Bank’s balance sheet shrank and the Federal Reserve expanded its holdings. The JPMorgan Emerging Markets Currency Index declined on forecasts that the U.S. central bank plans to reduce liquidity that boosted asset prices around the globe.

“The yen was clearly one of the stronger-trending currencies and early in the year, and it was a high-conviction trade for a lot of market participants,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said yesterday in a phone interview. “There was whole new range of polices, but the monetary part of those was involved much more aggressively. That’s where I think a lot of market participants were focusing.”

Japan’s currency weakened 17.6 percent to 105.29 per dollar in New York. The euro gained 4.2 percent to $1.3745 and climbed to a two-year high of $1.3893 on Dec. 27. The common currency advanced 21 percent to 144.91 yen.

The JPMorgan gauge of developing-country currencies fell 7.4 percent to 88.64 and reached a low of 87.29 on Sept. 3.

Winners, Losers

Among the 31 most-traded currencies tracked by Bloomberg, the Israeli shekel gained the most versus the dollar last year at 7.5 percent. The Argentine peso lost the most at 24.6 percent.

Argentina’s peso and the yen were the worst performers in the fourth quarter, with the Japanese currency declining 6.7 percent. In December, Hungary’s forint gained the most at 2.7 percent, while the Turkish lira leads losers with 6.1 percent drop.

Latvia becomes the 18th member of the euro area today, even as opponents of the currency switch outnumber proponents two-to-one as public expectations for accelerating inflation mount, opinion polls show.

BOJ Governor Kuroda’s board maintained its pledge to expand Japan’s monetary base by an annual 60 trillion ($570 billion) to 70 trillion yen at a gathering last month. In April, policy makers doubled monthly bond purchases to more than 7 trillion yen to spur consumer-price gains toward a 2 percent annual target.

Yen Forecast

The yen will probably be little changed at 105 per dollar at the end of the first half of 2014, economists surveyed by Bloomberg forecast. Prime Minister Shinzo Abe plans to raise Japan’s sales tax on April 1, the first increase since 1997.

“Dollar-yen has probably been one of the most popular leverage trades throughout the year,” said Robert Rennie, the Sydney-based global head of currency and commodity strategy at Westpac Banking Corp. “The BOJ’s intention to almost double the size of its balance sheet and more than double its monetary base target over a two-year period was heavily sponsored by the hedge fund community.”

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major counterparts, rose 3.5 percent last year, the most since an 8.9 percent advance in 2008.

Strategists are forecasting the U.S. tender will rally to $1.28 per euro in 2014, according to the median estimate in a Bloomberg survey. A year ago, a survey predicted a 3.7 percent gain for the greenback in 2013.

Dollar Bulls

“The big dollar bullish trend never took off,” BNP Paribas’ Serebriakov said. “The dollar-positive factors that didn’t materialize in 2013 have a higher chance of materializing this year because the Fed has started tapering.”

The U.S. central bank said on Dec. 18 it will trim its monthly bond purchases to $75 billion from $85 billion, taking the first step toward unwinding the stimulus. Policy makers coupled their decision to taper with a stronger commitment to maintaining an accommodative monetary policy.

While the ECB’s shrinking balance sheet has buoyed the euro last year, traders are betting the common currency will lose that advantage now that the Fed has started reducing its monetary stimulus program.

The European bank’s holdings have fallen to 2.3 trillion euros ($3.2 trillion) from a peak of 3.1 trillion euros in June 2012. The Fed is still adding assets, which climbed to about $4 trillion from less than $1 trillion in September 2008.

Euro Fade

“There’s some downside for the euro-dollar from here,” Robert Sinche, global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said yesterday in a phone interview. “We expect it to head lower, particularly in the second half of the year, as the pace of U.S. asset purchases dwindles to almost zero.”

ECB President Mario Draghi surprised investors in November by cutting the euro region’s main interest rate to a record 0.25 percent.

The South African rand weakened versus all 16 of its most-traded counterparts yesterday, extending the biggest annual slide since 2008, after a report showed an expansion in the country’s money supply slowed. The currency fell 0.7 percent to 10.4923 per dollar.

South Korea’s won rose against all of its major peers as the currency’s one-month forwards touched their highest level since August 2011. It climbed 0.5 percent to 1,049.80 per dollar after touching the strongest since August 2008.

Currency Markets

The Taiwanese dollar pared its first annual decline in five years, gaining 0.5 percent to 29.807 per U.S. dollar.

The pound gained versus most of its 16 major counterparts last year amid speculation strength in the housing market will support the U.K.’s economic recovery.

A gauge of home prices jumped 0.7 percent in December, according to a Bloomberg survey before Nationwide Building Society releases the data Jan. 3. Mortgage approvals climbed to 69,700 in November, the highest since January 2008, a separate survey showed before a Bank of England report due the same day.

“There’s plenty of evidence that the U.K. economy is doing well,” said Peter Rosenstreich, chief currency strategist at Swissquote Bank SA yesterday in Geneva. “The pound should be well supported into next year because of speculation that interest rates may have to go up sooner than what’s implied by the Bank of England.”

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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