December 27, 2012 / 9:06 PM / 5 years ago

FOREX-Yen extends weakness; dollar slips as US fiscal talks eyed

4 Min Read

* Dollar/yen on track to end above 200-week moving average
    * Risk reversals skewed toward more yen weakness
    * U.S. House will hold more fiscal talks on Sunday as
deadline nears

    By Wanfeng Zhou
    NEW YORK, Dec 27 (Reuters) - The yen fell to a more than
two-year low against the U.S. dollar on Thursday on expectations
of bold monetary stimulus in Japan, while the greenback slipped
against the euro ahead of more talks in Washington to avert the
"fiscal cliff."
    The dollar has risen 12 percent against the yen in 2012, on
track for its biggest annual gain since 2005. Yen selling has
accelerated in the past two months on speculation Japan's new
Prime Minister Shinzo Abe will pursue policies to weaken the
Japanese currency.
    "If everyone is simply going to take Mr. Abe at his word,
then we can go a lot further before this move is done," said Kit
Juckes, strategist at Societe Generale in London.
    Traders said speculators and hedge funds were increasingly
looking to sell yen for dollars. 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 on Reuters data, its
highest since mid-August 2010. It was last up 0.5 percent at
86.02 yen. Investors took out option barriers at 86 yen and
stop-loss buy orders above 86.10.
    The euro rose 0.2 percent to $1.3242. Against a
basket of currencies, the dollar erased early gains to trade
slightly lower at 79.590, still above a two-month low of 79.008
hit last week.
    The U.S. House of Representatives will hold a work session
on Sunday beginning at 6:30 p.m. EST (2330 GMT), a day before
the Dec. 31 deadline for reaching a deal that would avert
automatic tax increases and spending cuts. 
    The dollar had earlier gained after the top Democrat in the
U.S. Senate warned that the United States looks to be headed
over the "fiscal cliff." 
    The greenback tends to benefit when there are snags in U.S.
budget negotiations because it is highly liquid and perceived as
a safe haven. Conversely, when talks are running smoothly,
investors tend to buy currencies such as the euro and Australian
    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. 

    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.
    Abe, who has promised aggressive monetary easing by the Bank
of Japan and steps to weaken the yen, appointed a cabinet of
close allies on Wednesday. A weaker yen helps Japanese exports
and has lifted Japanese stocks. 
    The euro rose 0.6 percent to 113.95 yen, having
risen as high as 114.31 on Reuters data, the strongest since
July 2011.
    "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.
    "There's limited scope for a yen rebound while the Abe
government continues to threaten BoJ independence," he said.

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