U.S. dollar has momentum against the yen - will it last?

Thu Jan 31, 2013 11:33am EST

By Julie Haviv
    NEW YORK, Jan 31 (Reuters) - The U.S. dollar has reached its
loftiest level in two-and-a-half years against the Japanese yen
and investors expect the greenback to ascend ever higher peaks
in coming months.
    The dollar, last trading at 91.08 yen has climbed
over 16 percent since the beginning of the fourth quarter of
2012. 
    The trend is likely to continue. The yen is one of the few
major currencies with less attractive yields than the United
States. With Japanese officials taking aggressive moves to
weaken the yen, bets in the foreign exchange options market
suggest investors see more dollar gains, perhaps even
threatening the 100 yen level before long.
       
 
    Alessio de Longis, vice president and portfolio manager of
the Oppenheimer Currencies Opportunities Fund in New York, said
they have held a sizeable underweight in the yen since the
middle of 2012, stepping up that bet in the fourth quarter.     
    "This has been a very good trade for us and we continue to
hold a very large underweight," said de Longis.
    The greenback could climb another 5 percent to 10 percent
given the plans by monetary officials and the new administration
of Prime Minister Shinzo Abe to weaken the yen. Japan's deputy
economy minister, Yasutoshi Nishimura, recently said the yen's
decline is not over and a dollar/yen level of 100, last seen in
April 2009, would not be a concern.
    Strategists at Barclays revised their yen forecast on
Wednesday, believing the dollar will hit 96 yen in six months
and 100 in 12 months. A move of that magnitude would be
necessary to significantly affect inflation in Japan, the firm
said.         
    The recent move comes shortly after the Bank of Japan
doubled its inflation target to 2 percent and switched to an
open-ended commitment to buy bonds, albeit in 2014.
 
    "For the BoJ to achieve 2 percent inflation the yen will
need to weaken aggressively," de Longis said. 
    The options markets shows demand for dollar calls, the right
to buy dollars at a future date, has risen since last week, with
three-month risk reversals, trading as high as 1.1
percent on Thursday versus a low of about 0.325 percent last
week. 
    Risk reversals measure the relative demand for options on
the dollar rising and falling against the yen. 
    Oppenheimer's de Longis, part of a global debt team that
manages about $24 billion in assets, said the dollar could hit 
95 in the second-half of the year on a reduction in safe-haven
appetite and expectations of aggressive BoJ balance sheet
expansion, though he warned pullbacks are likely.
   The BoJ and the U.S. Federal Reserve have both slashed rates
close to zero, and Japan's 10-year Treasury note currently
trades at a yield of 0.77 percent.
    Comments made by Japan's new Prime Minister Abe that he
expected the BoJ to achieve its 2 percent inflation goal as soon
as possible have added to yen selling pressure. 
    
GOING THE OTHER WAY?
    Some believe the dollar's one-way direction may have lost
some momentum, partly because the BoJ's announcement was not
backed up by any sizeable increase in asset purchases. 
    "The headlines were big, but the substance more moderate,"
said Jens Nordvig, global head of currency strategy at Nomura
Securities in New York. "We think the policy catalysts for yen
weakness are running out of steam and are looking for range
trading."
   Anjun Zhou, head of multi-asset research at Mellon Capital in
San Francisco, said over the course of the past month they
became less overweight the yen because U.S. Fed remains the more
aggressive of the central banks.
    "The Federal Reserve has committed a lot more money to its
asset purchase program than the BoJ, which favors the yen," said
Zhou, part of a group that manages $30 billion in assets. "We
like the yen a little less right now because of inflation
expectations."
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