February 6, 2013 / 9:41 AM / 5 years ago

FOREX-Yen hits near 3-year low on BOJ easing progress

* Japan expected to install new BOJ chief quickly

* Fresh wave of yen selling vs dollar and euro

* Some investors cautious on euro ahead of ECB

By Nia Williams

LONDON, Feb 6 (Reuters) - The yen dropped to a 33-month low versus the dollar and a 34-month low against the euro on Wednesday on expectations Japan will soon install a new central bank chief to speed up aggressive monetary easing.

Despite gains versus the yen, the euro fell against the dollar, with some investors cautious ahead of a European Central Bank rate decision and news conference on Thursday.

News on Tuesday that current Bank of Japan Governor Masaaki Shirakawa will step down three weeks earlier than planned spurred the latest bout of yen selling, helping the dollar briefly rise above 94 yen on Wednesday.

The U.S. currency was last up 0.2 percent on the day at 93.77 yen, just below the 94.075 peak that was the dollar’s highest level since May 2010. Traders reported hedging-related demand and buying by longer-term investors and said there were supporting bids at 93.50 yen.

The euro also pushed higher against the Japanese currency to hit 127.71 yen.

“As far as Japan is concerned they are exceeding market expectations with the pace of policy implementation and that’s going to keep the yen under pressure,” said Ian Stannard, European head of FX strategy at Morgan Stanley.

He said Morgan Stanley’s first quarter forecast of 95 yen was likely to be exceeded, and a test of 98 to 100 yen was now within reach.

Japanese Prime Minister Shinzo Abe, who has put the BOJ under intense pressure to do more to spur the economy, has made it abundantly clear he wants a governor who will be bolder than the outgoing BOJ chief in loosening monetary policy. Abe is expected to name Shirakawa’s successor later this month.

Despite sporadic complaints from some governments such as Germany and South Korea, Abe’s support for aggressive easing does not seem to have irked many other countries, making yen selling comfortable, said Minori Uchida, chief currency strategist at Bank of Tokyo-Mitsubishi UFJ.

“The G20 finance ministers meeting next week is unlikely to discuss currencies much. The market is likely to test further downside on the yen in the near future,” Uchida said.

Moves in the options market also reflected widespread expectations of more yen weakness.

The implied volatility on one-month dollar/yen options rose above 13 percent, its highest level since August 2011 while the risk reversal spread widened to levels not seen in many years in favour of dollar calls.

WARINESS AHEAD OF ECB

The euro weakened versus the dollar ahead of the ECB’s rate decision on Thursday, falling 0.3 percent to $1.3537 and edging away from last week’s 14-month high of $1.3711.

Although the consensus forecast is for policymakers to keep rates on hold at 0.75 percent, some investors are worried ECB President Mario Draghi may echo concerns from other euro zone officials about recent euro strength hurting the economy.

French President Francois Hollande called on Tuesday for a target exchange rate to protect the currency from “irrational movements”, although the idea ran into immediate opposition from Germany.

“There’s some caution going into the ECB meeting following the comments from Hollande yesterday, but the ECB is not at a stage where it will start to address the rise in the euro, so I expect a rebound from there,” Morgan Stanley’s Stannard said.

The euro has gained 2.5 percent against the dollar since the start of the year and some market players were also booking profit on its strong gains. FX strategists at Deutsche Bank put out a trading recommendation to take profit on euro longs.

The Australian dollar dropped to a 2-1/2 month low of US$1.0312 after soft Australian retail sales data strengthened the case for interest rate cuts this year. Traders reported selling by macro funds.

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