Yen Drops as Waning Haven Demand Triggers Rally in Real

The yen weakened as demand for haven assets waned after a surge yesterday amid turmoil in Ukraine and Gaza pushed the Japanese currency to the strongest level versus the euro in five months.

Japan’s currency dropped against 27 of its 31 major peers, with higher-yielding counterparts including Brazil’s real and Indonesia’s rupiah gaining, as President Barack Obama said a surface-to-air missile launched from insurgent-held territory in eastern Ukraine brought down a Malaysian jetliner yesterday. The euro fell below $1.35 for the first time in five months. A gauge of the dollar dropped from a four-week high after U.S. consumer confidence declined.

“Investors were left trying to answer questions of how does this affect order flow and my positions, and the answer is, it’s not clear yet,” said Richard Cochinos, the head of Americas Group of 10 currency strategy at Citigroup Inc. in New York. “I don’t think it’s risk-on. People are generally cautious over the weekend -- I think it’s unresolved in their minds.”

The yen fell 0.2 percent to 101.34 per dollar at 5 p.m. New York time after gaining 0.5 percent yesterday. Japan’s currency slipped 0.2 percent to 137.08 per euro after earlier appreciating to 136.71, the strongest level since Feb. 5. It gained 0.6 percent for a second week. The euro was little changed at $1.3524 after reaching $1.3491, the lowest level since Feb. 6.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major counterparts, fell less than 0.1 percent to 1,009.53 after touching 1,011.12, the highest since June 20.

Winners, Losers

The real and South Africa’s rand were the day’s biggest gainers of the dollar’s 31 major peers, adding more than 1 percent. The Indonesian rupiah gained as much as 0.7 percent. Chile’s peso, down 0.6 percent, led decliners.

Futures traders this week added to bets the euro will fall against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline of the currency compared with those on a rise -- net shorts -- was 62,846 on July 15, the most since May 2013.

The euro fell below $1.35 today, crossing what’s seen by some dealers as the dividing line between success and failure for the European Central Bank’s attempts to boost growth, as traders speculated that so-called barrier options used to protect trading positions had been in place to shield investors against a decline to that level.

Options Contracts

In simple barrier euro-dollar options contacts trading, a notional value of 466.4 million euros ($630 million) changed hands on July 16, the most since June 26, followed by 429 million euro the next day, according to data compiled by Bloomberg.

“Euro-yen is a very important cross to watch -- I think that could be a very good risk barometer in the current environment,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “If we do start to see these events continuing, then the market will have to start to take that on board.”

Malaysia’s ringgitt fell 0.1 percent to 3.1817 after the jet flying from Amsterdam to Kuala Lumpur crashed in eastern Ukraine yesterday, killing all 298 people on board.

Ruble, Shekel

The ruble rose as Russia and Ukraine blamed each other for the downing of the plane as investigations got under way. Ukraine’s state security service said it intercepted phone conversations among pro-Russian militants discussing a missile strike on the jet. Russian President Vladimir Putin said the government in Kiev bore responsibility because of the conflict in the region.

The ruble added 0.1 percent to 35.1425 per dollar after plunging more than 2 percent yesterday as the U.S. and European Union imposed additional sanctions on the country.

The shekel fluctuated as Israel sent ground forces into the Gaza Strip in a military offensive aimed at stopping missiles fired by Hamas and other Palestinian militants after a cease-fire collapsed.

Israel’s currency was little changed at 3.4284 per dollar after rising and falling as much as 0.3 percent.

“The yen strengthened earlier this week and is coming back a little today,” said Athanasios Vamvakidis, head of Group of 10 currency strategy at Bank of America Corp. in London. “Some investors seem to be finding the opportunity of the small risk-off move to increase risk exposure.”

JPMorgan Chase & Co.’s index of implied volatility on three-month options of Group of Seven currencies dipped to 5.34 from 5.46 yesterday. It dropped to a record 5.11 on July 3.

Fed View

In the U.S., the Bloomberg Dollar Spot Index erased a gain as the Thomson Reuters/University of Michigan’s preliminary sentiment index of sentiment decreased to 81.3 from 82.5 the prior month. The median projection in a Bloomberg survey of 68 economists called for a July reading of 83.

The Conference Board’s index of U.S. leading indicators, a measure of the outlook for the next three to six months, increased 0.3 percent in June after a revised gain of 0.7 percent the prior month, the New York-based group said. The median forecast of 49 economists surveyed by Bloomberg called for a 0.5 percent advance.

The Federal Reserve may have to raise interest rates more quickly than planned as unemployment falls and inflation quickens, St. Louis Fed President James Bullard said in a speech yesterday in Owensboro, Kentucky. Fed Chair Janet Yellen told lawmakers this week borrowing costs may rise sooner than markets expect should the labor market continue to improve faster than anticipated.

The Fed has kept the benchmark interest rate at a record zero to 0.25 percent since December 2008. Traders are betting there’s about a 75 percent chance policy makers will raise the rate by September, fed funds futures data compiled by Bloomberg show.

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