- Greenback gains from 1 1/2-year low as two economies diverge
- IMF cuts global growth outlook as Fed considers rate move
The dollar advanced against the yen on Tuesday, snapping a seven-day slide, as traders questioned the speed of gains by the Japanese currency and weighed the relative performance of the two economies.
The greenback has rebounded from a 1 1/2-year low against the yen as an indicator of momentum showed the dollar’s decline may be extreme. Japan’s currency slumped against all of its major peers on Tuesday after Finance Minister Taro Aso said Japan will take action as needed if there are one-sided currency moves, and gains in crude damped demand for haven currencies.
The greenback has fallen almost 10 percent this year versus the yen as the Fed has pared projections for the pace of interest-rate increases, citing concern about global growth. Philadelphia Fed President Patrick Harker and Dallas Fed chief Robert Kaplan’s remarks Tuesday echoed recent calls from Chair Janet Yellen that policy makers should err on the side of caution before tightening monetary policy. While the International Monetary Fund cut its 2016 world expansion forecast, the U.S. is predicted to grow 2 percent versus 0.6 percent for Japan.
The move in the dollar “is probably consolidation after all of the weakness that we’ve had,” said Charles St-Arnaud, a senior economist at Nomura International Plc in London. “We’re reaching levels that are already quite low, and we continue to have discussion from Japanese officials reminding that it could still intervene at some point, reminding the market that it would rather have dollar-yen higher than where it is.”
The dollar added 0.1 percent to 108.60 yen as of 7:58 a.m. in Tokyo on Wednesday after gaining 0.6 percent in New York. It fell to 107.63 on Monday, the weakest since October 2014. The yen’s seven-day advance through Monday was the longest since September 2012.
The dollar’s 14-day relative strength index touched 24 Monday, below the 30 level that indicates to some analysts it has fallen too far, too fast and is set to reverse direction.
Investors have piled into the yen for its perceived safety as China’s economic slowdown continues to influence global markets. The IMF downgraded its forecast for global expansion to 3.2 percent on Tuesday, as weak exports and slowing investment dim prospects in the U.S., a consumption-tax hike saps growth in Japan, and a slump in the price of everything from oil to wheat continues to hobble commodities producers.
The yen is no longer considered undervalued, making the market more cautious in pushing it further, according to Valentin Marinov, head of Group of 10 foreign-exchange strategy at Credit Agricole SA’s corporate and investment bank unit in London.
“The yen has moved closer to what many in the market see as fair value,” said Marinov. “For a long time, markets were skeptical that the Japanese officials were seriously considering any official action given that the yen was so undervalued,” he said. “This has changed.”