Dollar Rallies Most Against Yen in 2014 on Fed-BOJ Policy Split

The dollar rose the most against the yen this year as the Bank of Japan maintained its monetary stimulus while Federal Reserve officials backed reductions to bond-buying even as winter weather slows U.S. economic growth.

The yen fell against most of its 16 major peers after Japan’s central bank doubled a funding tool to 7 trillion yen ($68 billion) and said individual banks may borrow twice as much low-interest money as previously allowed under a second facility. Brazil’s real led gains among major currencies on higher-than-forecast foreign investment and a government pledge to cut spending. China’s yuan traded in Hong Kong slid most since September 2011 on signs of a slowdown in the world’s second-biggest economy.

“Investors are becoming more willing to give the U.S. economy the benefit of the doubt by viewing the recent weakness as mainly weather related, with dollar-yen rate having grinded higher,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said in an e-mail. “In the near-term, the yen still appears too strong.”

The dollar rose 0.7 percent this week to 102.66 yen in New York, the biggest gain since the week ended Dec. 27. The greenback dropped 0.4 percent to $1.3746 per euro, a third weekly decline. Japan’s currency was fell 1.1 percent to 140.90 per euro.

The Bloomberg Dollar Spot Index, which monitors the greenback against 10 major counterparts, gained 0.3 percent to 1,020.97, reaching the highest level since Feb. 13.

Futures Positions

Hedge funds and other large speculators increased bets the yen will decline against the dollar, figures from the Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the yen compared with those on a gain -- so-called net shorts -- was 79,784 on Feb. 18, compared with net shorts of 78,786 a week earlier

Brazil’s currency rallied after the central bank reported yesterday that foreign direct investment declined to $5.1 billion last month, which was more than the median forecast of analysts surveyed by Bloomberg, which called for $4 billion. Brazil posted a $11.6 billion deficit in the current account, the broadest measure of trade in goods and services, compared with the $11.7 billion median estimate.

Finance Minister Guido Mantega said yesterday that Brazil will make an additional effort to meet its fiscal goals if the government needs to boost spending to compensate for higher energy costs. He said the current account deficit will narrow in 2014.

Less Concern

“These numbers slightly reduce concern over the country’s external accounts financing,” Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil in Sao Paulo, said in a telephone interview.

The currency added 1.8 percent to 2.3457 per dollar, reaching the strongest level on a closing basis since Jan. 20.

An index of emerging-market currencies compiled by Bloomberg dropped 0.1 percent after rising the past two weeks.

The yuan fell 1 percent to 6.0933 per dollar, based on data compiled by Bloomberg. The currency fell 0.13 percent to close at 6.0914 in Shanghai after the People’s Bank of China cut the daily reference rate by 0.05 percent to a two-month low of 6.1176. The offshore yuan is the worst performer in February among 12 Asian exchange rates tracked by Bloomberg.

China’s Factories

China’s manufacturing is contracting at the fastest pace in seven months, according to a preliminary purchasing managers’ index released Feb. 19, and economists predict gross domestic product will climb this year at the slowest pace since 1990.

“The PMI is helping to scale back renminbi appreciation expectations,” said Paul Mackel, Hong Kong-based head of Asian currency research at HSBC Holdings Plc. “I’d expect offshore yuan profit-taking to extend.”

The central bank has allowed companies in the Shanghai Free Trade Zone to borrow yuan from overseas in its latest efforts to expand global use of its currency, it said in a statement on its website yesterday.

The 18-nation euro rose to the highest since Jan. 2 against the greenback as a current account surplus spurs demand for the currency. The area’s non-seasonally adjusted trade surplus widened to 33.2 billion euros ($45.6 billion) in December, report showed this week.

Euro Resilience

“The euro zone’s current account balance recorded a further improvement that explains the resilience of the euro,” Nordine Naam, a strategist at Natixis in Paris, wrote in an e-mailed note yesterday. “The risk is that several ECB members could speak out next week to prepare the markets for a monetary status quo. If this scenario unfolds, the EUR/USD could rebound temporarily as high as 1.382.”

The Bank of Japan retained on Feb. 17 its pledge to expand the monetary base by 60 trillion to 70 trillion yen per year. It is too early for a detailed discussion of exiting the strategy, central bank Governor Haruhiko Kuroda said.

The U.S. central bank said in December it would start cutting bond purchases by $10 billion per month and policy makers decided on another reduction of the same size in January. Several officials said in “the absence of an appreciable change in the economic outlook, there should be a clear presumption in favor” of continuing to trim purchases, according to the minutes of their Jan. 28-29 gathering released Feb. 19.

The Philadelphia Fed said Feb. 20 that its general business index fell to -6.3, compared with an estimate of 8, according to a Bloomberg survey. Fewer Americans filed applications for unemployment benefits last week, a Labor Department report showed Feb. 20, while the 336,000 figure exceeded the median estimate of 335,000 in a Bloomberg survey of economists.

“The Fed was like, ‘we’ve got growth, things are going the right direction and the tapering is going to be exactly to plan,’” Peter Frank, global head of G-10 and Asia currency strategy at Banco Bilbao Vizcaya Argentaria SA in London, said in a phone interview. “When you’ve got quite a broad-based recovery as the U.S. economy has got, you can absorb these temporary shocks such as diverse weather. Business sentiment is picking up, despite all this.”

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net

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

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