Morgan Stanley boosted its forecast for a stronger dollar against the yen, even after the U.S. currency tumbled yesterday by the most in two years.
The U.S. currency will appreciate to 107 yen by the end of 2013, up from a previous forecast of 105, said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. The greenback fell as much as 3.2 percent yesterday, the most since Marcy 17, 2011, to 96.97.
Rising U.S. yields will lead to more investment in the U.S., resulting in a stronger dollar, Stannard said. Yields will increase as the U.S. economy strengthens and the Federal Reserve scales back its bond-buying monetary stimulus, he said.
“We see the U.S. becoming an investment destination, which will lead not just to portfolio inflows, but also increased internal investment, which will lead to increased capital demand,” Stannard said in a telephone interview. “It’s going to be a very supportive factor in the longer term.”
The dollar increased 0.5 percent to 97.47 yen in New York. The currency rose beyond 100 yen on May 9 for the first time since 2009 and has since weakened back below the 100-level. The greenback is the third worst-performing major currency during the past week.
Investors yesterday unwound the most bearish futures market position on the yen since July 2007, triggering dollar-yen stops and strengthening the Japanese currency. The yen has declined 11 percent this year against the dollar as The Bank of Japan has increased monetary stimulus to support Prime Minister Shinzo Abe’s goal of a 2 percent rate of inflation.
While the dollar may see some more weakness in coming days as this retracement completes its course, it will resume its upward trend, according to Stannard.
“Once this correction is complete and the market is reassured that the underlying themes are still in place, we’re likely to see the dollar trend resume,” Stannard said. “Investors will return and use this correction as an opportunity to re-establish some dollar bullish positions.”