Dollar Rises to Five-Year High Versus Yen on Taper Speculation

The dollar rose to the highest level against the yen in five years as signs of faster U.S. economic growth added to speculation the Federal Reserve may trim its $85 billion of monthly asset purchases at a meeting next week.

The U.S. currency advanced Dec. 12 after retail sales increased the most since June and a Fed official said the odds of tapering bond purchases have risen along with gains in the labor market. South Korea’s won had the best five-day gain in eight weeks as exporters accelerated repatriation of overseas income. The Australian dollar slumped as the central bank talked down the currency. Fed policy makers meet Dec. 17-18.

“Dollar gains will probably come from U.S. growth, which pushes up U.S. yields more than expected,” said Geoffrey Yu, a senior currency strategist at UBS AG in London. “The biggest theme will be U.S. tapering. I still like to be long dollar-yen. I know that’s the consensus view, but all the risks are still to the upside.”

The dollar climbed 0.3 percent to 103.21 yen this week in New York, and reached 103.92, the highest since October 2008. The euro rallied 0.3 percent to $1.3742, a fifth straight week of appreciation. Japan’s currency fell 0.6 percent to 141.87 per euro.

The Bloomberg U.S. Dollar Index, which tracks the U.S. currency against 10 major counterparts, was little changed at 1,016.79. The measure is up 3.1 percent this year.

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.

South Korea’s won advanced the most among major currencies this week as exporters sold the greenback ahead of the year-end book closing.

The currency appreciated 8.5 percent since the end of June, the most among the 11 most-traded Asian currencies tracked by Bloomberg. The nation’s export growth quickened in the second half, Finance Minister Hyun Oh Seok said at a briefing in Seoul today. South Korean authorities are monitoring the currency market for possible herd behavior, Hyun said Dec. 10.

“There was a stream of dollar sales from engineering and electronics makers and shipbuilders this week, and there seems to be more to come,” said Han Sung Min, a Seoul-based currency dealer at Busan Bank. “Upward pressure on the won will remain, although the market is on the lookout for intervention.”

Won Trade

The won strengthened 0.5 percent this week to 1,052.55 per dollar, the biggest gain since the period ended Oct. 18.

The Australian dollar had its longest stretch of weekly losses since 1985, as the central bank head intensified his efforts to talk down the world’s fifth-most traded currency.

Governor Glenn Stevens signaled a weaker Aussie is preferable over lower interest rates to help spur the nation’s slowing economy. The Aussie touched a more-than-three month low of 89.10 U.S. cents after Stevens said a level of 85 cents “would be closer to the mark than 95 cents,” in an interview published in the Australian Financial Review today.

“The RBA appears to have made a strategic decision in mid-October that they could get the Aussie down and they should try and get it lower as they downgraded their view of the resource sector,” said Greg Gibbs, a Singapore-based strategist at Royal Bank of Scotland Group Plc. “They have sent a message and the currency has reacted. The real risk by saying 85 cents is that the market feels more comfortable with the currency around current levels.”

Aussie Bets

Futures traders increased bets the Aussie will weaken net shorts to 48,550 as of Dec. 10, the most since September and compared with 44,311 a week earlier, CFTC data show.

U.S. retail sales in the U.S. climbed 0.7 percent in November, the most since June, after a 0.6 percent advance in October that was larger than previously reported, Commerce Department figures showed on Dec. 12.

Fed Bank of St. Louis President James Bullard, who votes on policy this year, said on Dec. 9 a small cut in asset purchases might recognize labor-market improvement while still providing the committee the opportunity to monitor inflation in the next six months. A job report last week that showed the jobless rate dropped to a five-year low of 7 percent in November as employers added more workers than forecast.

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

Rate Relations

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 2.17 percentage points, almost the 2 1/2-year high of 2.24 reached on Dec. 5.

“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 dollar will rise to 110 yen at the end of next year, according to Standard Chartered, compared with a median forecast of 108 in a Bloomberg News survey of analysts.

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