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| Dollar set for weekly drop on continuing stimulus buzz |
| Bloomberg / Dec 27, 2009, 00:15 IST |
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The dollar was poised to end three consecutive weeks of gains against the euro on speculation the Federal Reserve will maintain stimulus measures to secure the US economy’s recovery.
The greenback traded near the lowest level in one week against the 16-nation euro before reports forecast to show a slide in US business activity and a rebound in initial jobless claims. The yen was set to break a two-week advance against the euro after a government report showed Japan’s consumer prices slid in November, backing expectations the Bank of Japan will keep interest rates near zero.
“Speculation about an early exit from credit easing in the US may weaken if incoming data confirm a patchy recovery,” said Keiji Matsumoto, a strategist in Tokyo at Nikko Cordial Securities Inc. “It looks to be premature to conclude that the dollar carry-trade will come to a full end.”
Jobless claims
The Institute for Supply Management-Chicago Inc will report on December 30 its barometer of US business activity fell to 55.1 in December from 56.1 the previous month, according to a Bloomberg News survey. Readings above 50 signal expansion.
The number of Americans filing claims for unemployment benefits in the week ending 27 probably rose to 460,000 after dropping to 452,000 in the previous week, the lowest level since September 2008, according to a separate survey ahead of the release of the data on December 31.
Fed Bank of St Louis President James Bullard said he saw interest rates remaining near zero in 2010, as the central bank tried to keep the recovery on track, the Wall Street Journal reported this week.
Clear picture
“Unless we see a more clear picture about the withdrawal of dollars by the Fed, there is a good chance of investors tapping excess dollars again and resuming investments on higher-yielding currencies,” said Yuichiro Harada, senior vice-president of the foreign-exchange division at Mizuho Corporate Bank, a unit of Japan’s second-largest lender.
The dollar pared weekly losses on speculation Treasuries will draw buying interest from global money managers.
The difference in yields between 2- and 10-year Treasuries reached a record 2.88 percentage points on December 22.
“Investors can generate stable returns just by re-investing funds raised in the US back into Treasuries, and thereby avoiding the risks of currency fluctuations,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co, a unit of France’s third-largest bank. “The dollar will benefit from this change of investment strategy.”
The spread between 10-year Treasury yields and the same maturity Japanese government bonds reached 2.53 percentage points yesterday, the widest gap since December 2007.
November deflation
The yen was headed for a 5.2 per cent drop against the dollar this month, the biggest since February. The Japanese government said consumer prices, excluding fresh food, fell 1.7 per cent in November from a year earlier, matching the median forecast in a Bloomberg survey.
Bank of Japan (BOJ) Governor Masaaki Shirakawa said in an interview with TV Tokyo this month that the central bank would “persistently” keep interest rates at “virtually zero” to fight deflation.
No fast exit
“The BOJ can’t possibly seek an exit from stimulus anytime before other central banks do so,” said Masahiro Ito, senior manager of foreign-exchange sales and marketing at Central Tanshi FX Co, a unit of Japan’s largest money broker. “This will keep a lid on the yen.”
The Japanese currency traded as weak as 91.87 yen on December 22 and 23, the lowest level since October 27.
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