Yen Drops Versus Dollar on Central-Bank Divergence

The yen held a two-day loss against the dollar before central bank statements this week that may signal extended monetary easing in Japan as the U.S. plans an exit from stimulus.

Demand for the yen was limited before the release tomorrow of minutes from the Bank of Japan’s June 10-11 meeting when policy makers stuck with a pledge to expand the monetary base by as much as 70 trillion yen ($700 billion) per year. Federal Reserve Chairman Ben S. Bernanke is scheduled to testify on monetary policy this week. Australia’s dollar gained as investors pared bets the Reserve Bank will cut interest rates after the minutes of its last meeting released today said the recent drop in the currency may boost inflation.

“There’s a good chance Bernanke will again suggest the Fed will start to taper monetary easing as early as September,” said Noriaki Murao, a New York-based managing director of the marketing group at the Bank of Tokyo-Mitsubishi UFJ Ltd. “If that’s the case, the initial reaction is likely to be dollar buying and yen selling.”

The yen traded at 99.76 per dollar as of 6:40 a.m. in London from 99.86 yesterday, having weakened 0.9 percent in the past two sessions. The currency was little changed at 130.54 per euro from yesterday, when it lost 0.6 percent. The euro added 0.2 percent to $1.3085. The Aussie dollar gained 1 percent to 91.84 U.S. cents.

Lower Volatility

JPMorgan Chase & Co.’s option index measuring swings in global currencies was near a one-month low. Implied volatility, which the bank’s option index tracks and is used in models to set option prices, was at 10.56 percent, after dropping to 10.47 percent on July 9, the lowest since June 18.

Bernanke is scheduled to deliver his semi-annual monetary policy report to Congress this week, starting tomorrow at the House Financial Services Committee. The Fed purchases $85 billion of Treasuries and mortgage debt each month as part of its quantitative-easing program to cap borrowing costs.

While Bernanke on July 10 damped speculation the central would slow its buying, minutes released the same day of the Fed’s last policy meeting showed “about half” of participants indicated “it likely would be appropriate” to end the purchases late this year.

“You’ve got that Fed tapering coming through together with continued monetary policy easing from Japan,” Steve Brice, chief investment strategist at Standard Chartered Plc in Singapore, said in a Bloomberg Television interview today. “That should lead to dollar-yen going to at least 105-110 on a 6-to-12 month view.”

U.S. Data

U.S. industrial production probably rose 0.3 percent in June from the previous month, the biggest increase since February, according to the median estimate of economists surveyed by Bloomberg News before the Fed releases its figures today.

Analysts in a separate Bloomberg poll estimate the Labor Department data today will show consumer prices grew 1.6 percent from a year earlier in June, after a 1.4 percent gain in May. That is below the Fed’s 2 percent goal.

The Bloomberg Dollar Index, which tracks the greenback against 10 other major currencies, slid 0.1 percent to 1036.12.

The extra yield investors demand to hold 10-year U.S. Treasuries over same-maturity Japanese government bonds was at 173 basis points, or 1.73 percentage points, after widening to 188 points on July 5, the most since July 2011.

100 Level

“We retain a bearish JPY stance but the move is not going to be a one-way bet,” Mitul Kotecha, the global head of foreign-exchange strategy in Hong Kong at Credit Agricole SA, wrote in a note to clients today. “Fed policy expectations will drive USD/JPY, with a renewed relative increase in U.S. yields required to push USD/JPY sustainably above the psychologically important 100 level.”

Australia’s inflation outlook, which is slightly higher because of a weaker currency, could still provide some scope for further easing, the minutes of RBA’s July 2 meeting showed. Swaps data compiled by Bloomberg show traders see a 55 percent chance of the central bank cutting its key interest rate next month, down from the 65 percent probability indicated yesterday.

The Aussie has fallen 9.3 percent in the past six months, the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar has gained 6.1 percent in the same period, the biggest gainer, while the yen declined 7.3 percent.

Stimulus Scope

“People were probably positioned a little short going into the minutes expecting a bit more dovishness,” said Peter Dragicevich, a Sydney-based currency economist at Commonwealth Bank of Australia. The minutes showed “even though the fall in the currency is likely to see inflation pick up slightly, it’s still within the range where they could provide stimulus.”

The 17-nation euro was supported before German data forecast to show investor sentiment in Europe’s biggest economy improved.

In Germany, the ZEW Center for European Economic Research in Mannheim will probably say today its index of investor and analyst expectations increased to 40 this month from 38.5 in June, according to the median estimate of economists surveyed by Bloomberg. A reading of that level for the gauge, which aims to predict economic developments six months in advance, would be the highest since March.

“Confidence in the German economy is lending support to the euro,” Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-largest financial group by market value. “I’m skeptical about yen weakness. Should the prospects for tapering of U.S. quantitative easing lead to a drop in risk assets, the yen will be bought as a safe asset, especially given it’s cheap now.”

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