Yen Strengthens From Five-Year Low on Fed Views; Pound Weakens

The yen rose from a five-year low versus the dollar amid speculation on the timing of a cut in the Federal Reserve’s $85 billion of monthly bond purchases.

The Japanese currency fell earlier as the yield difference between Treasuries and Japanese bonds traded at almost the widest since April 2011. The euro weakened as European Central Bank policy maker Peter Praet said the region’s recovery is “fragile.” The Federal Reserve and Bank of Japan are scheduled to hold policy meetings next week.

“The yen’s fall to fresh lows prompted some profit-taking,” Joe Manimbo, a market analyst in Washington at Western Union Business solutions, a unit of Western Union Co., said in a phone interview. “The yen’s rebound partially stems from caution in the runup to the Fed next week.”

The yen gained 0.2 percent to 103.21 per dollar at 5 p.m. New York time, down 0.3 percent this week, after reaching 103.92, the weakest level since October 2008. Japan’s currency added 0.2 percent to 141.87 per euro. It reached 142.83, also the weakest since October 2008. The shared European currency fell 0.1 percent to $1.3742.

The JPMorgan G-7 FX Volatility Index dropped to 8.64 percent after rising to 8.78 percent, the highest level since Oct. 2. It has increased from a 2013 low of 7.48 percent reached on Oct. 28, and is still below the year’s average of 9.23 percent.

Futures Positions

Hedge funds and other large speculators trimmed bets the yen will weaken, according to data from the Commodity Futures Trading Commission. The difference in the number of wagers on a decline in the currency compared with those on a gain -- so-called net shorts -- was 129,711 as of Dec. 10, compared with 133,383 a week earlier.

The British pound weakened for a third day against the dollar on speculation its advance to a two-year high this week was overdone and as Bank of England Chief Economist Spencer Dale said interest rates will stay low. Sterling is the worst performer out of its 16 major peers and slipped 0.3 percent to $1.63, after falling to its weakest level since Nov. 27.

South Africa’s rand strengthened versus all of its major counterparts as Chile’s largest drug maker raised its takeover offer for Adcock Ingram Holdings Ltd., the largest producer of South African hospital products. The currency climbed 0.9 percent to 10.2920 per dollar.

The Chilean peso rose versus all but one of its 31 most-traded peers as the country’s central bank kept borrowing costs unchanged yesterday after inflation accelerated more than expected in November, climbing back to the target range for the third time in the past 12 months. The currency increased 0.4 percent to 529.89 per dollar after gaining 0.8 percent, the most in a week.

Yield Spreads

The dollar rose versus the yen this week as Treasury 10-year yield traded at 2.86 percent after rising two basis points yesterday, according to Bloomberg Bond Trader prices. The yield premium over equivalent Japanese government bonds was at 2.18 percentage points, almost the 2 1/2-year high of 2.24 reached on Dec. 5.

The Fed will probably begin reducing $85 billion in monthly bond purchases at its Dec. 17-18 meeting, according to 34 percent of economists surveyed on Dec. 6 by Bloomberg News, an increase from 17 percent on Nov. 8.

“The prospect of Fed tapering, either sooner or later, and continued monetary easing by the Bank of Japan remain a powerful driver of dollar-yen gains specifically, and obviously broad yen trade-weighted depreciation,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. The yen will drop to 110 per dollar at the end of next year, according to Standard Chartered, compared with a median forecast of 108 in a Bloomberg News survey of analysts.

Central Bank

The BOJ, which buys more than 7 trillion yen ($70 billion) of Japanese government bonds every month in its bid to stoke inflation, starts a two-day meeting on Dec. 19. The central bank aims to keep ultra-easy monetary policy in place beyond the two-year timeframe, the Financial Times reported, citing an interview with Governor Haruhiko Kuroda.

The yen has weakened 14.5 percent this year, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar appreciated 3.8 percent and the euro climbed 8.6 percent, the biggest advance.

“The reasons why the yen is depreciating now are the same reasons it was depreciating earlier in the year, it’s the fact that people are talking about chances that the BOJ will expand its monetary policy again” next year, said Sonja Marten, a currency strategist at DZ Bank AG in Frankfurt. “To a degree if the Fed begins tapering this puts it on a path that can eventually lead to higher rates and this might be a factor too” pushing the yen lower against the dollar, she said.

The euro area’s recovery is muted and fragile, ECB Executive Board member Praet said in Antwerp.

Options Trade

Trading in over-the-counter foreign-exchange options totaled $43 billion, from $52 billion yesterday, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate amounted to $13.9 billion, the largest share of trades at 33 percent. Options on the euro-dollar rate totaled $5.9 billion, or 14 percent.

Dollar-yen options trading was 5.7 percent less than the average for the past five Fridays at a similar time in the day, according to Bloomberg analysis. Euro-greenback options trading was 16 percent below average.

Before it's here, it's on the Bloomberg Terminal.