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Dollar Meltdown to Drive Yen Harder Than Franc: Chart of the Day

The cost of insuring against a drop in the dollar versus the yen rose to a four-month high as investors sought havens amid a possible U.S. credit-ratings downgrade and bet the Bank of Japan will struggle to halt gains in its currency.

The CHART OF THE DAY compares the cost of contracts to protect against a fall in the dollar versus the yen and Swiss franc. Also shown is the Nikkei 225 Stock Average, which has gained 14 percent from its low after Japan’s March 11 earthquake and tsunami. The lower panel tracks the exchange rates. Group of Seven nations jointly sold the yen March 18, a day after it reached a postwar record high, in an effort to reduce “excess volatility and disorderly movements.” The franc rose to a record on July 29.

“There may be less willingness on the part of the other central banks to act with the Bank of Japan now, and that would of course make intervention much less effective,” said Michael McCarthy, Sydney-based chief market strategist at CMC Markets Asia Pacific Pty Ltd. “With the buying of Japanese stocks by international investors adding to repatriation flows,” the yen may rally to another record, he said.

A possible U.S. credit downgrade is boosting demand for assets in nations considered better able to weather financial turmoil. The yen and franc often gain during periods of stress because their export-reliant economies don’t need foreign capital to balance current accounts -- the broadest measure of trade. The yen jumped 4.5 percent in 26 minutes on March 17 to a record 76.25, as the threat of radiation leaks from a crippled Japanese nuclear plant stoked risk aversion.

Traders are paying a premium of 1.9 percentage points, the most since March 17, on contracts to sell the dollar against the yen over options granting the right to buy it in a month. The so-called risk reversal rate for put options on the greenback versus the franc is 0.8. The divergence signals concern Japan won’t be able to arrest gains in the yen on its own, said McCarthy. “We’ve seen time and time again how difficult it is for a single central bank to support a currency,” he said.

The yen climbed 5 percent last month to 76.76 per dollar in New York on July 29. The franc gained 7 percent in the same period to 78.55 centimes per dollar and reached a record 78.51. Options show a 73 percent probability the yen will rise to 75 by year-end, data compiled by Bloomberg show.

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