Yen Bulls Target Euro After Hawkish Fed Speakers Buoy the Dollar

  • Odds of higher U.S. interest rates by July climb to 54 percent
  • ECB set to announce latest policy decision on June 2

Yen bulls are shifting their focus to the euro as speculation that the Federal Reserve will increase interest rates as early as next month buoys the dollar.

Deutsche Bank AG, Nomura Holdings Inc. and Societe Generale SA all recommended buying the yen against the euro in notes to clients toward the end of last week, as the Japanese currency hovered near a three-year high. Euro bear Deutsche Bank says the Bank of Japan is losing its power to lift inflation expectations. Selling the euro against the yen will take advantage of both a stronger Japanese currency and dollar in the near term, according to Societe Generale. Nomura also points to the differences in real yields and current-account surpluses.

“We express a yen-bullish view against the euro to sidestep potential Fed hikes -- and so dollar strength,” Bilal Hafeez, the London-based global head of foreign-exchange research at Nomura, wrote in an e-mailed note. The euro-yen pair is “especially appealing as it is not another trade premised on getting the Fed view right,” he wrote.

The yen appreciated 0.2 percent to 122.38 per euro as of 9:26 a.m. London time, having strengthened 0.9 percent Monday. It touched 121.49 on May 6, a level unseen since April 2013. Japan’s currency weakened 0.3 percent to 109.53 per dollar, after gaining 0.8 percent a day earlier.

The yen strengthened about 10 percent against the dollar this year, the biggest gainer among the Group-of-10 currencies, on speculation the BOJ is running out of options to reach a 2 percent inflation target.

Japan has no intention of further weakening the exchange rate to boost competitiveness, Finance Minister Taro Aso told parliament on Tuesday. The yen had its biggest one-day gain against the greenback in May on Monday. Japanese and U.S. finance chiefs had remained divided over whether yen-selling intervention was warranted following Group-of-Seven meetings over the weekend.

BOJ Governor Haruhiko Kuroda and his colleagues refrained from additional easing at their policy meeting on April 28 as they opted to take more time to assess the impact of the negative interest-rate program. The European Central Bank expanded stimulus in March and will announce its latest policy decision on June 2.

‘Hard Time’

“The BOJ will have a hard time to fight yen strength as its credibility to markets has been eroded,” said Olivier Korber, a foreign-exchange derivatives strategist at SocGen in Paris, who recommends buying the yen versus the euro. The trade is a way to hedge the possibility of more risk aversion, with “toppish oil prices, China woes and a bouncing dollar” which is now reflecting a higher probability of a summer hike, he said.

Futures traders assign a 54 percent chance the Fed will raise rates from the current range of 0.25 percent to 0.5 percent by July, topping 50 percent for the first time since March. The odds of a move in December have also increased to 76 percent from 58 percent at the end of last month.

San Francisco Fed President John Williams and Philadelphia Fed President Patrick Harker said Monday they see two or three rate increases in 2016, adding to a chorus of pro-tightening commentary from policy makers.

(An earlier story was corrected to show the yen rose on Monday.)

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