FOREX-Yen sinks to 2-year low vs dollar; euro up for 2nd day

Thu Dec 27, 2012 9:30am EST

Related Topics

* Dollar/yen on track to end above 200-week moving average
    * Risk reversals skewed towards more yen weakness
    * U.S. "fiscal cliff" stalemate supports dollar


    By Gertrude Chavez-Dreyfuss
    NEW YORK, Dec 27 (Reuters) - The yen dropped to its lowest
against the U .S. d ollar in more than two years on Thursday o n
expectations a ne w government in Tokyo w ill pu sh for aggressive
monetary stimulus to boost a sluggish economy and take steps to
weaken the Japa nese curr ency.
    The euro, meanwhile, rose for a second straight session and
traded above $1.32 for eight consecutive days partly on
position-adjustment going into the end of the year and a growing
view that euro zone debt tensions have eased.
    But on a quiet pre-New Year's week, the focus remained
squarely on the yen. S peculators and hedge funds were
increasingly looking to sell yen for dollars, traders said. Some
said a dollar close above its 200-week moving average of 84.95
yen on Friday -- the first since late December 2007-- would be a
strong signal of further strength in the U.S. currency.
    The dollar rose to 85.92 yen, its highest since
August 2010. It was last up 0.4 percent on the day at 85.91 yen
with option barriers cited at 86 yen and stop loss buy orders
above 86.10 yen.
    "Yen weakness, based on expectations that the new Japanese
government will succeed in driving the dollar to 90 yen with a
combination of more aggressive monetary and fiscal policy, is
offering support to other currencies," said Marc Chandler,
global head of currency strategy, at Brown Brothers Harriman in
New York.  
    Prime Minister Shinzo Abe, who has threatened to revise a
law guaranteeing the Bank of Japan's independence if it refuses
to set a 2 percent inflation target, appointed a cabinet of
close allies on Wednesday. 
    The yen has fallen around 10.5 percent versus the dollar in
2012, its biggest annual drop since 2005, with most of that
weakness coming in the past two months as expectations mounted 
Abe will pursue policies to weaken the yen. A weaker yen helps
Japanese exports and has already lifted Japanese stocks.
    Japan's benchmark Nikkei share average hit a 21-month high
on Thursday and has climbed 22 percent this year, putting it on
track for its best yearly gain since 2005. 
    In the options market, risk reversals in dollar/yen
 showed a further bias towards yen weakness. Risk
reversals from one-month up to four-years were
skewed towards dollar calls or yen puts, reflecting increased
confidence among investors to bet against the Japanese currency.
    One-month implied dollar/yen volatility, a
gauge of expected moves, rose to 8.5 vols from 7.3 last week,
close to the Dec. 13 near-six-month high of around 8.65,
highlighting growing demand to hedge against sharp price swings.
    The yen touched its lowest level against the euro in nearly
17 months. The euro hit 114.14 yen, its strongest
against the yen since early August of 2011.
    
    CLIFF CONCERNS
    The euro traded at $1.3274, up 0.4 percent on the day
and just below an eight-month high of $1.3308 hit last week.
Speculators further trimmed short bets against the single
currency as euro zone debt worries ebbed.
    Brown Brothers' Chandler said the euro zone's move away from
the abyss was clearly due to the European Central Bank and its 
asset purchase program. He also cited moves by the European
Commission to grant several countries including France and Spain
an extra year to reach the 3.0 percent fiscal deficit target.
    "An official announcement has not been made, but the signals
from the EC and the Commissioner for Economic and Monetary
Affairs (Olli) Rehn are unmistakable," Chandler said.
    However, euro/dollar moves are also linked to U.S. budget
negotiations. A U.S. budget agreement is seen as positive for
riskier currencies such as the euro and negative for the
safe-haven and highly li q uid dollar.    
    Concerns the U.S. Congress might fail to head off a
potentially recession-inducing "fiscal cliff" of tax hikes and
spending cuts that are due to kick in next year could cap the
single currency's gains. 
    The dollar index  stood at 79.4 11, down 0.3
percent on the day and a bove a two-month low of 79.008 hit last
week.
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