Yen Declines as G-20 Gives Japan Leeway on Stimulus; Pound Falls

The yen fell for a fourth day against the dollar after the Group of 20 gave Japan leeway to reflate its economy by indicating the nation’s monetary stimulus plan doesn’t contravene a pact to avoid currency devaluations.

Japan’s currency dropped at least 1 percent versus all of its 16 most-traded peers amid bets on more of the quantitative-easing stimulus from the Bank of Japan that has helped the currency slide to a four-year low versus the greenback. Sterling extended a drop versus the greenback after Fitch Ratings cut the U.K.’s credit grade by one level. South Korea’s won climbed.

“G-20 and the BOJ have made it very clear to the financial community that Japan has the green light regarding continued QE and resulting yen weakness,” Douglas Borthwick, a managing director and head of foreign exchange at Chapdelaine FX in New York, wrote today in a client note. “The global hope is that inflation will drive growth in Japan, finally awakening this sleeping giant. Yen weakness is now a given; the only uncertainty is the pace at which this unfolds.”

The yen weakened 1.4 percent to 99.52 per dollar at 5 p.m. New York time. It lost for a 1.2 percent over the past five days. The currency slid to 99.95 on April 11, the weakest level since April 2009. Japan’s currency dropped 1.4 percent to 129.88 per euro. The dollar was little changed at $1.3052 to Europe’s shared currency after rising 0.6 percent earlier.

The JPMorgan G7 Volatility Index, based on three-month futures options on Group of Seven nations’ currencies, touched 9.7 percent, the highest level since March 22. It has averaged 9.07 percent this year.

Rating Cut

Britain’s pound depreciated versus most of its major peers after Fitch Ratings downgraded the U.K.’s long-term credit rating one step to AA+ from AAA, citing a “weaker economic and fiscal outlook.” Sterling declined 0.3 percent to $1.5231 after rising earlier as much as 0.6 percent. It slid 0.3 percent to 85.69 pence per euro.

Futures traders increased their bets that the yen will weaken against the greenback. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on an advance, so-called net shorts, was 93,411 in the period through April 16, the most in a month, up from 77,697 over the previous week, according to figures from the Commodity Futures Trading Commission.

Bearish bets on the euro were trimmed to 29,764 over the same period, compared with net shorts of 50,858 a week earlier.

G-20 Meeting

G-20 finance ministers and central bankers, meeting for the first time since the Bank of Japan unleashed new measures aimed at delivering 2 percent inflation within two years, said today in Washington those actions are “intended to stop deflation and support domestic demand.” They echoed their promise of February that nations will refrain from “competitive devaluation” and avoid “persistent exchange-rate misalignments.”

The BOJ said April 4 it plans to purchase 7.5 trillion yen ($76 billion) of bonds a month as it fights 15 years of deflation.

“This G-20 meeting is more of a dud than usual and it’s not going to stand in the way of a lower yen,” said Todd Elmer, a foreign-exchange strategist at Citigroup Inc. in Singapore. There had been expectations “we could see some stronger international opposition to yen weakening, but this really puts those concerns to rest.”

Options Outlook

There’s a 90 percent probability the yen will weaken to 100 per dollar in the next month, according to options data compiled by Bloomberg.

Options traders are the most bullish on the dollar against its Japanese counterpart in almost two months. The premium for three-month options granting the right to buy the greenback versus the Japanese currency relative to those allowing for sales touched 0.94 percentage point today, the most since Feb. 18, according to 25-delta risk reversals.

“From a tactical basis we can understand being dollar bullish at the moment,” David Bloom, global head of currency strategy at HSBC Holdings Plc in London, said in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua and David Tweed. Still, the BOJ measures are not going to work, and the dollar “is going to slide back again. At the moment I’m considered the lunatic fringe,” he said.

The South Korean won gained versus all 16 of its most-traded counterparts as an advance in Asian and European stocks fueled demand for greater returns. The currency climbed 1.6 percent to 8.89 yen after appreciating to 8.90, the strongest since Oct. 2, 2008. The won gained 0.7 percent to close at 1,116.30 per dollar in Seoul.

South Korea’s currency has rallied from an eight-month low versus the dollar set last week as the Communist North refrained from conducting a nuclear test or a missile launch.

Kiwi Gains

New Zealand’s dollar appreciated against most major counterparts as a Chinese government economist said the nation’s economy may rebound in the second and third quarters of the year. China is the South Pacific nation’s biggest trading partner. The so-called kiwi was up 0.1 percent to 84.19 U.S. cents after earlier increasing as much as 1 percent.

“We’re still seeing strong evidence of high demand for high yield, which underpins the Aussie dollar and New Zealand dollar,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Singapore.

New Zealand’s dollar has strengthened 6.2 percent in the past six months, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The Aussie rose 1.9 percent, the yen slid 20 percent and the pound fell 3 percent.

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