Yen to slip against dollar but hold below 100

By Dinesh Mehta

BANGALORE (Reuters) - Strategists have barely changed their outlook for the Japanese yen compared to last month and remain convinced it will lose ground against the dollar by a year from now, a Reuters poll showed on Wednesday.

The latest monthly survey shows the yen trading at 90 in a month, around where it was trading on Wednesday. Median forecasts saw dollar/yen at around 92 in three months and slightly higher at 95 in six, rising to 98 in 12 months.

The November poll showed median forecasts for the yen well below 100 for all four time-horizons for the second month running.

But the range of forecasts was wide, as is usual in this poll. Views varied from a further rally in the Japanese currency to 84 yen per dollar to a sell-off to trade at 117 per dollar 12 months from now.

But views have been shaped more by the U.S. dollar outlook. The greenback has been under pressure over investor worries about how the U.S. will fund its huge budget deficit, despite clear evidence the economy has emerged from recession.

Global stock markets have soared since March but the momentum has run out of steam in recent weeks as fears of sustainable economic growth and solid corporate earnings data has dented investors' search for higher returns.

But some analysts are not convinced that risk aversion will underpin the currency for any significant length of time.

"(The yen) may still benefit from the new spike of risk aversion due to falling stock markets, but in the medium term we expect (it) to return on the offer side," said FX strategist Roberto Mialich at UniCredit MIB.

One-month annualized dollar/yen volatility is expected to fall in November, based on the latest Reuters calculations. Analysts say the divergence of forecasts in Reuters currency polls offers a leading indicator of exchange rate volatility in the following month. <VOL/POLL>.

Other currencies have shifted aside the yen as a first choice for a funding currency given most central banks in developed economies still have policy rates at or near record lows.

But given that downward price pressures are likely to persist for some time, Bank of Japan Governor Masaaki Shirakawa said on Wednesday that the central bank will maintain its accommodative monetary policy stance.

Reuters polls show the Bank of Japan is expected to keep interest rates at historic lows until at least the second half of 2011.

That could see a return for the yen before long to its widespread use as a funding currency for carry trades, where investors borrow in low-yielding currencies to invest in higher yield elsewhere.

"The yen will gradually weaken over time as the carry trade story becomes prevalent once more," said Vimal Popat at Cantor Fitzgerald.

The Fed, which announces its latest rate decision later on Wednesday, the European Central Bank and Bank of England are expected follow the Reserve Bank of Australia and raise rates -- but not before the third quarter of next year.