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Yen Weakens Versus Euro Amid Bank of Japan Stimulus Speculation

The yen weakened to four-month low versus the euro as investors speculated the Bank of Japan will expand monetary easing at its meeting this week.

The Japanese currency fell to its lowest level in a week versus the dollar. Taiwan’s dollar and South Korea’s won rallied as international investors increased holdings of Asian stocks after the Federal Reserve announced last week it would undertake an asset purchase program. Brazil’s real dropped the most since July after the central bank intervened to help exporters.

“The Fed’s actions last week have turned the spotlight on the BOJ’s much more limited balance-sheet policy response,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. Positive risk sentiment from the U.S. central bank’s announcement has also weighed on the yen, he said.

The yen fell 0.3 percent to 103.24 per euro at 5 p.m. New York time, after touching 103.86, the lowest level since May 9. Japan’s currency dropped 0.4 percent to 78.71 per dollar, reaching 78.93, the weakest since Sept. 7. The euro weakened 0.1 percent to $1.3117.

Ruskin said he expects the euro may rally to $1.3480.

Bank Meeting

Japan’s central bank may follow the Fed and the ECB in expanding its balance sheet. The meeting starts tomorrow and results will be announced Sept. 19.

The yen has weakened 2.2 percent last week, the biggest decline among the 10 developed-nation currencies on the Bloomberg Correlation-Weighted Indexes. The dollar fell 0.9 percent and the euro strengthened 1.4 percent.

“There’s speculation that the BOJ will do something to increase quantitative easing through their asset purchase program,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. “It’s primarily on the euro-yen. That’s the big driver of the euro going higher.”

BOJ Governor Masaaki Shirakawa said on Sept. 6 that the yen’s appreciation causes a decline in Japan’s exports and that its negative effect is “dominant.” Japan’s markets are closed today for a national holiday.

Demand for the yen was also damped as China and Japan’s worst diplomatic crisis since 2005 is putting at risk a trade relationship that’s tripled in the past decade to more than $340 billion.

Trade Tensions

“If the tensions between China and Japan get worse, that reduces trade prospects for Japan, which should soften the yen a little more,” Paul Christopher, the St. Louis-based chief international strategist at Wells Fargo Advisors, said in an interview on Bloomberg Television’s “Lunch Money” with Adam Johnson. “We see the euro coming back down to the $1.20, $1.25 area. We think it’s overdone.”

The euro’s 14-day relative strength index versus the dollar and the yen remained above 70 today. A reading above 70 indicates an asset may have rallied too far, too quickly and is due for a correction.

Gains in the shared currency were tempered as Spanish 10-year bonds extended a decline, pushing the yield up 19 basis points to 5.97 percent.

“Spanish yields may push higher until it is clear that Spain is officially asking for aid,” said Aroop Chatterjee, a currency strategist at Barclays Plc in New York. “ The ECB has acted but there’s more to come down the road. This will continue to keep any euro gains muted. We prefer to sell the dollar versus riskier currencies rather than the euro.”

Spain’s Debt

The euro declined against the dollar as Spanish Prime Minister Mariano Rajoy considered whether to request economic assistance for the indebted nation. Rajoy’s government will unveil additional austerity measures by the end of the month based on recommendations made in July, including a possible increase in the retirement age, shifting from labor to consumption taxes and deregulating closed professions, according to European officials. Demonstrations two days ago in Madrid against fiscal cuts underpinned the political balancing act Rajoy faces.

Since July 26, when ECB President Mario Draghi said he would do “whatever it takes” to save the 17-nation euro, the currency has appreciated versus each of its 16 major counterparts tracked by Bloomberg.

Brazil’s real was the biggest loser among the dollar’s 16 most-traded counterparts tracked by Bloomberg after the central bank sold reverse currency swaps for the fourth time in four days. Finance Minister Guido Mantega reiterated in a newspaper interview that the government won’t let the real strengthen.

The real fell 1 percent to 2.0320 per dollar.

The Dollar Index gained 0.1 percent to 78.941, after weakening to the lowest since February last week.

The index, which IntercontinentalExchange Inc. uses to track the greenback against those of six U.S. trading partners, may pause its decline this week as it’s entering an “important” support zone, Niall O’Connor, a New York-based technical analyst at JPMorgan Chase & Co, wrote yesterday in a research note to clients. This area includes the 78.398 level that is the 50 percent retracement of its rise from 72.696 on May 4, 2011, to 84.100 on July 24, according to O’Connor. It also includes the May 1 low of 78.603.

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