Dollar Will Fail to Reach 100 Yen Until 2011, Citigroup Says

The dollar will fail to strengthen beyond 100 yen until next year as it will take time for the U.S. interest-rate advantage to widen enough to lure investors, according to Citigroup Inc.

Narrowing deficits have helped the U.S. currency begin a longer-term uptrend after it fell to a 14-year low in November, said Osamu Takashima, chief currency strategist at Citigroup in Tokyo. The dollar may be able to breach 100 yen once the interest-rate differential between the U.S. and Japan exceeds four percentage points, he said.

“The dollar may have already reversed its long-term decline,” Takashima said. As the Federal Reserve will need to raise rates for the dollar to keep rising, “the greenback’s full-fledged recovery will likely be delayed until next year,” he said.

The dollar traded at 92.85 yen as of 11:30 a.m. in Tokyo, having climbed 9.4 percent from last year’s low of 84.83, which was the weakest since June 1995. The greenback last traded above 100 yen in April 2009.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the U.S. currency against those of six trading partners, was at 81.203. The gauge dropped to 70.698 in March 2008, the lowest since its inception in 1973.

Takashima said the dollar’s recovery was chiefly prompted by the narrowing of U.S. trade and current-account deficits since 2006. The current-account shortfall shrank to $97.7 billion in the second quarter of last year, after ballooning to a record $214.8 billion in the third quarter of 2006.

Fed Rates

The Fed’s target rate for overnight loans between banks has been at a record low of between zero and 0.25 percent since December 2008. The Bank of Japan has kept its benchmark interest rate at 0.1 percent since December 2008.

There is an 66 percent chance U.S. policy makers will increase their benchmark by at least a quarter percentage point by December, according to futures on the Chicago Board of Trade. The BOJ’s target rate will remain unchanged until at least the third quarter of 2011, a Bloomberg survey of economists shows.

“Whether the dollar will top 100 yen won’t be debated until the interest-rate gap widens to around 4 percentage points,” Takashima said.

Takashima joined Citibank Japan Ltd. on March 24 after being hired from Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest banking group. He was ranked No. 14 among Japan-based interest-rate and currency strategists and analysts in a Nikkei Veritas list published March 21.

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