Yen Slumps as Stimulus Optimism Damps Refuge Appeal

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The yen weakened against most of its 31 major peers as equities gained on optimism central banks will sustain or add to monetary stimulus measures, damping demand for a refuge from financial market turmoil.

Emerging-market currencies rallied, while a gauge of expectations for volatility slipped from an eight-month high reached this week when traders re-evaluated prospects for global growth, U.S. monetary policy and the spread of Ebola. Chile’s peso rose as policy makers signaled the period of interest-rate cuts is coming to an end, and Indonesia’s rupiah rose before the president’s inauguration.

“There’s certainly some stability in the market today,” said Robert Lynch, a currency strategist at HSBC Holdings Plc in New York. “But the unwinding of dollar strength against the yen is probably not over. We’re not very convinced about dollar-yen moving higher.”

The yen fell 0.5 percent to 106.88 per dollar at 5 p.m. New York time, and was up 0.7 percent this week. It slipped 0.1 percent to 136.38 per euro. The dollar rose 0.4 percent to $1.2761 per euro, set for a 1.1 percent loss since Oct. 10.

Higher-yielding currencies rebounded against the yen, led by 2.1 percent rally by the Brazilian real as a presidential election runoff approaches and a 1.8 percent gain in Indonesia’s rupiah.

Stocks Rebound

The Standard & Poor’s 500 Index and the Stoxx Europe 600 Index ended an eight-day losing streak after European Central Bank Executive Board member Benoit Coeure said today officials will start the next phase of asset buying in coming days.

“People are a little bit more calm today, macro investors are re-accessing after these moves,” Brad Bechtel, managing director of Faros Trading LLC in Stamford, Connecticut, said in a phone interview. “Some of the rebound could just be a dead cat bounce, you don’t necessarily get too comfortable just yet.”

JPMorgan Chase & Co.’s Global FX Volatility Index fell 16 basis points to 7.93 percent, paring this week’s increase to 33 basis points. It climbed as high as 8.56 percent yesterday, the most since Feb. 6. That’s up from a record-low 5.28 percent reached in July.

“Volatility has jumped across all asset classes, including FX markets,” said Greg Gibbs, the head of Asia-Pacific markets strategy at Royal Bank of Scotland Group Plc in Singapore. “You can put it down to the weaker economic outcomes we’ve seen lately -- German data has been soft, Chinese data has been soft, and there’s Ebola.”

President Barack Obama is naming former White House official Ron Klain to coordinate the U.S. response to the deadly Ebola virus amid rising public concern and criticism of the government’s response so far.

FOMC Caution

Speculation the U.S. central bank will raise rates next year had led to a record rally in the U.S. currency. The advance started to reverse last week after minutes of the Sept. 16-17 meeting of the Federal Open Market Committee showed participants said expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated.”

Futures traders estimated a Federal Reserve interest-rate increase at 65 percent odds by December 2015, suggesting it’s now the earliest date for a likely move. They saw a 52 percent chance for the Fed to tighten in July next year as recently as Oct. 3.

The dollar has still risen 6 percent in the past three months, the best performer in that period among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes. The New Zealand dollar has weakened most, falling 4.1 percent, while the yen is down 0.2 percent.

Hedge funds and other large speculators raised their net bullish dollar bets versus eight of its major peers to a record 331,464 contracts as of Oct. 14, compared with 313,878 a week earlier, according to data from the Washington-based Commodity Futures Trading Commission.

‘Positive Adjustment’

In emerging markets, Indonesia’s rupiah appreciated 1.2 percent to 12,108 per dollar, leading gains today versus the greenback among 31 major currency pairs. The inauguration of the nation’s President-elect Joko Widodo is on Oct. 20.

“There seems to be some position adjustment before the weekend and inauguration of the new government next week,” said Tsutomu Soma, Tokyo-based department manager of the fixed-income business unit at Rakuten Securities Inc. “In the long-term, the main scenario is that the Fed will probably start raising rates sometime next year and the dollar will continue to see appreciation pressure.”

Chile’s peso rallied 0.7 percent to 586.52 per dollar and reached a five-week high after the central bank signaled yesterday’s rate cut may be the last in the current cycle following eight reductions in 13 months.

Inflation Target

The central bank removed a reference to evaluating the convenience of further reductions in a statement accompanying yesterday’s decision, while reiterating its commitment to meeting the 3 percent inflation target. They also said that previous rate cuts were having an impact on credit conditions, even as the economy grew at the slowest pace in more than four years.

Brazil’s real appreciated 1.5 percent to 2.4354 per dollar on speculation opposition candidate Aecio Neves’s performance in a presidential debate yesterday will give him momentum as the election runoff approaches.

China will set an economic growth target of about 7 percent for 2015, tolerating the weakest expansion in a generation as leaders tackle debt risks and imbalances, according to analysts polled by Bloomberg. Reports next week may show manufacturing growth stalled in the euro area in October, while it slowed in the services sector.

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