Yen Climbs With Pound Versus Euro as Policy Outlooks Diverge

The yen rose the most in three months against the euro as the Bank of Japan refrained from expanding monetary stimulus a week after the European Central Bank cut interest rates.

Japan’s currency reached a four-month high versus the 18-nation euro as the central bank maintained plans to increase the monetary base at a pace of 60 trillion yen ($588 billion) to 70 trillion yen per year, in line with estimates of all 33 economists in a Bloomberg News survey. Sterling rose to the highest since November 2012 against the shared currency after Bank of England Governor Mark Carney said interest-rate increases may be sooner than expected. The dollar was little changed against a basket of major peers before the Federal Reserve meets June 17-18 to consider plans to reduce stimulus.

“Euro-yen is not far off making new lows for the year,” said Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford, Connecticut. “The market came into 2014 expecting more from the BOJ over the course of the year and not necessarily factoring in more easing from the ECB. Now in practice, what we’ve seen is the opposite.”

The yen strengthened 1.2 percent to 138.17 per euro this week in New York, the biggest gain since March 14. The Japanese currency rose 0.4 percent to 102.04 versus the dollar, while the single currency fell 0.8 percent to $1.3540.

Lira Loses

Hungary’s forint and Turkey’s lira were the worst performing of 31 major currencies this week, falling 2 percent. The New Zealand dollar was the biggest winner, adding 1.9 percent after the nation’s central bank raised interest rates for a third time this year.

The lira fell as traders weighed the impact of fighting in Iraq on the net oil importer. The nation’s current-account deficit, at 7.5 percent of gross domestic product in March, is the highest among 11 emerging markets in eastern Europe and Africa monitored by Bloomberg.

Rising oil prices “can strain corrections in Turkey’s current-account deficit,” Cristian Maggio, an emerging-markets strategist at Toronto-Dominion Bank in London, said in e-mailed comments. The lira is also facing pressure as Turkish hostages are being held in Iraq, he said.

The currency slumped to 2.1195 per dollar.

The kiwi rallied to 86.64 U.S. cents as the probability of raising interest rates at the central bank’s next meeting in July jumped to 68 percent yesterday from 52 percent June 12, according to OIS index data compiled by Credit Suisse.

’Hawkish Tone’

“The RBNZ maintained their hawkish tone, and based on their three-month bill rate forecast, it does imply that another 50 basis points of tightening is expected this year,” Roy Teo, Singapore-based currency strategist at ABN Amro Bank NV, said in a phone interview.

Sterling was the third-biggest winner versus the euro this week, after Carney indicated the central bank may increase interest rates from a record low. Reports this week showed U.K. unemployment declined more than forecast and industrial production rose at the fastest annual pace since 2011.

“People have been expecting the U.K. to be among the first to raise rates,” Ken Dickson, an Edinburgh-based director for foreign exchange at Standard Life Investments Ltd., which oversees $305 billion, said in a phone interview.

The pound appreciated 1.7 percent to 79.82 pence per euro and reached 79.73 pence, the strongest level since Nov. 13, 2012. It advanced for an eighth day versus the common currency, its longest run of gains since April 2010. Sterling rose 1 percent to $1.6968 and touched $1.6992, the highest since May 6.

Retail Sales

U.S. consumer confidence unexpectedly fell to a three-month low in June, an index of sentiment showed this week, after data showed wholesale prices dropped in May. Retail sales grew at a slower than forecast pace, casting doubt on the U.S. recovery.

“The retail sales figures were definitely big,” Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York, said by phone. “Those were somewhat disappointing obviously and we saw the dollar weaken a little bit on that.”

The Fed is forecast to further reduce its monthly bond-buying while holding its target for the federal funds rate at virtually zero where it has been since December 2008.

The Bloomberg Dollar Spot Index closed at 1012.73, little changed for the week.

Yen Chart

The yen declined below its 200-day moving average versus the euro, a technical indicator that can suggest further losses.

Hedge-fund managers and other large speculators added to bets the yen will weaken against the dollar. The difference in the number of wagers on a decline in Japan’s currency, compared with those on a rise -- so-called net shorts -- was 82,162 contracts on June 10, the most since April 8, according to data from the Commodity Futures Trading Commission.

BOJ policy makers will continue to ease until a 2 percent inflation target is achieved and is stable, BOJ Governor Haruhiko Kuroda said in Tokyo after the bank’s decision yesterday. The BOJ is halfway to its target, he said.

Europe’s central bank is weighing further easing, including asset purchases, as it too looks for inflation of about 2 percent. The ECB cut its deposit rate to an unprecedented minus 0.1 percent last week, with President Mario Draghi pledging additional measures, if needed.

The yen has gained 2.8 percent this year among a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar lost 0.7 percent while the euro dropped 2.3 percent.

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