FOREX-Yen hits 2-year low vs dollar; euro off on US fiscal cliff

Thu Dec 27, 2012 12:34pm EST

Related Topics

* Dollar/yen on track to end above 200-week moving average
    * Risk reversals skewed toward 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. dollar in more than two years on Thursday on
expectations a new government in Tokyo will push for aggressive
monetary stimulus to boost a sluggish economy and take steps to
weaken the Japanese currency.
    The dollar, meanwhile, got a bid against the euro,
Australian, and New Zealand dollars on U.S. budget issues. U.S.
Senate Majority Leader Harry Reid said on Thursday the United
States looks headed to go over the "fiscal cliff" of tax hikes
and spending cuts set to kick in next week. 
    The greenback tends to benefit when there are snags in U.S.
budget negotiations because it is highly liquid. Conversely,
when talks are running smoothly, investors tend to take on more
risk and buy currencies such as the euro and Australian dollar. 
    But in a quiet week before the New Year holiday, the focus
remained squarely on the yen. Speculators 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 86.15 yen, its highest since
mid-August 2010. It was last up 0.5 percent at 86.06 yen.
Investors took out option barriers at 86 yen and stop-loss buy
orders above 86.10.
    "Investors are looking to see whether the Bank of Japan will
ease at its next policy meeting in January, and if it doesn't
ease aggressively enough, then the new government could come,
which would hurt the BoJ's independence," said Shaun Osborne,
chief currency strategist at TD Securities in Toronto.
    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. 
    "There's limited scope for a yen rebound while the Abe
government continues to threaten BoJ independence," Osborne
said.
    The yen has fallen around 10.6 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 toward yen weakness. Risk
reversals from one-month up to four-years were
skewed toward 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 since
early July. The euro hit 114.31 yen, a 17-month high.
    
    CLIFF CONCERNS
    The euro traded at $1.3216, down slightly for the day
and below an eight-month high of $1.3308 hit last week. Europe's
common currency had traded higher for most of the session.
    Reid's comments on the fiscal cliff pressured the euro,
analysts said.
    TD Securities' Osborne said a week ago, it looked like going
over the cliff was 50-50.
    "But now it seemed like a certainty, with everyone giving up
on the negotiations," he said. "So now it looks like we slide
off the cliff in the new year, and then we have to take it from
there."
   Should Congress fail to act by Dec. 31, tax rates for all
Americans would jump back to pre-2001 levels. Two days later,
$109 billion in automatic spending cuts would start to take
effect. Together, the higher taxes and lower spending would suck
about $600 billion out of the U.S. economy, potentially causing
a new recession in 2013. 
    The dollar index  stood at 79.776, up 0.2
percent for the day and above a two-month low of 79.008 hit last
week.
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