December 27, 2012 / 7:40 PM / in 5 years

FOREX-Yen slide continues; fiscal stalemate lifts dollar

* 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 Wanfeng Zhou
    NEW YORK, Dec 27 (Reuters) - The yen fell to a more than
two-year low a ga inst the dollar o n Thursday on expectations
Ja pan's new government will push for aggressive monetary
stimulus, while the U.S. currency was broadly higher on
uncertainty about fiscal talks in Washington.
    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
Pri me Minister Shinzo Abe wi ll 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
86.01 yen. Investors took out option barriers at 86 yen and
stop-loss buy orders above 86.10.
    The euro was little changed at $1.3221. Against a
basket of currencies, the dollar rose 0.1 percent to 79.698,
ab ove a two-month low of 79.008 hit last week.
    The top Democrat in the U.S. Senate warned on Thursday that
the United States looks to be headed over the "fiscal cliff" of
tax hikes and spending cuts that will start next week if
squabbling politicians do not reach a deal. 
    Majority Leader Harry Reid told the Senate in a speech that
"it looks like that is where we're headed." 
    The greenback tends to benefit when there are snags in U.S.
budget negotiations because it is highly liquid and perceived as
a haven. Conversely, when talks are running smoothly, investors
tend to buy currencies such as the euro and Australian dollar.
    Shaun Osborne, chief currency strategist at TD Securities in
Toronto, said a week ago the odds of going over the cliff l ooked
like 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. 

    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 0.5 percent to 113.76 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," TD's Osborne said.
    "There's limited scope for a yen rebound while the Abe
government continues to threaten BoJ independence," he said.
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