December 17, 2012 / 8:16 PM / 5 years ago

FOREX-Japan yen hit as loose policy seen; Draghi weighs on euro

* Dollar hits 20-month high vs yen
    * Euro touches 8-1/2-month peak vs yen
    * Euro gains erased vs US dollar as Draghi speaks of low
    * Most expect BOJ to ease policy at this week's meeting
    * Hefty short yen positioning may limit yen falls

    By Daniel Bases
    NEW YORK, Dec 17 (Reuters) - The yen dropped to a 20-month
low against the U.S. dollar on Monday after Japan's Liberal
Democratic Party won a landslide election victory that leaders
promise will usher in aggressive monetary easing policies to
weaken the currency.
    Former Prime Minister Shinzo Abe returns to power with the
LDP's victory. He campaigned on a platform to boost the moribund
economy with hyper-easy monetary policy and big fiscal spending
to beat deflation, a recipe for weakening the yen that gives
Tokyo an export advantage in international markets.
    The euro rose against the yen as well, but saw its gains on
the U.S. dollar undermined by European Central Bank President
Mario Draghi after he reiterated concerns over slow growth of
Europe's economy.
    In mid-afternoon New York trade, the greenback was up 0.38
percent to 83.77 against the yen, its best level since
April 2011. The euro climbed 0.33 percent to 110.24 yen
 but fell back from its 8-1/2-month high of $1.3191 to
trade at $1.3158, down 0.04 percent against the U.S. currency.
    "Just looking at the euro's movement's today, it is coming
off the highs after Draghi's comments about growth. Still, it is
in an upward trend channel," said Eric Viloria, senior currency
strategist at in New York.
    Year-to-date, the euro is up 1.6 percent against the
greenback and 10.7 percent against the yen. The U.S. dollar is
up nearly 9 percent on the yen with two weeks to go in the year.
    There were competing forces tugging at the euro on Monday.
    A factor leading to the weakness was Draghi saying the
medium-term outlook for the euro zone economy remained
"challenging". Weak demand is expected to extend into 2013 and
only a gradual recovery is forecast toward the end of that year
while interest rates are expected to continue at record lows.
    On the side strengthening the euro against the U.S. dollar
was Richmond Federal Reserve Bank President Jeffrey Lacker, who
said he expects it will be another three years until the U.S.
unemployment rate drops to 6.5 percent. 
    That means monetary policy is expected to remain in the zero
to 0.25 percent range through 2015, conditions that weaken the
buying power of the U.S. dollar.
    Analysts expect the prospect of ultra-loose monetary policy
in Japan to weaken the yen further in coming weeks, depending on
the pace of policy change. However, given that bets against the
yen are already hefty, losses could be limited.
    The LDP's massive victory will give the new government a
greater chance to push through policies and possibly appoint a
more dovish central bank chief next year. The LDP and its ally
the New Komeito party secured the two-thirds majority needed to
overrule parliament's upper house. 
    "The fact that the LDP secured a two-thirds majority gives
them a strong mandate and will lead to significant policy
changes," said Ian Stannard, head of European currency strategy
at Morgan Stanley.
    "The yen weakening trend will be sustainable and dollar/yen
will move higher while euro/yen also has the potential to move
sharply higher." He said Morgan Stanley forecasts the dollar to
rise to 90-92 yen by the end of 2013, while the euro could rise
to 113 yen by the end of this year.
    The Bank of Japan is scheduled to meet on Wednesday and
Thursday. It will most likely increase its asset-buying and
lending program, currently at 91 trillion yen, by another 5-10
trillion yen, sources familiar with the bank's thinking said.
    Analysts said the dollar may be hampered by any signs of
trouble in U.S. talks to avert the "fiscal cliff" of $600
billion worth of tax increases and spending cuts due next month.
    Republican House Speaker John Boehner edged slightly closer
to President Barack Obama on Sunday with a proposal to extend
low tax rates for those earning less than $1 million. Obama has
set a threshold for extending low tax rates for those earning
below $250,000. U.S. stocks have risen and Treasuries have
dropped on the new development.
    Latest data from the U.S. Treasury showed overseas demand
for U.S. assets was weak in October. Foreigners were net sellers
to the tune of $56.7 billion in October, the largest outflow
since July 2011.
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