February 12, 2013 / 9:31 PM / in 5 years

FOREX-Yen rallies as G7 official says concerned about weak currency

* G7 official says statement intended to signal concern on
yen moves
    * Statement on currencies initially cools currency war talk
    * ECB's Draghi says no such thing as a currency war
    * Yen volatility spikes

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Feb 12 (Reuters) - The yen rebounded on Tuesday,
rising from a nearly three-year low against the dollar hit
during the previous session, after an official from the Group of
Seven said a statement by the group was meant to express
"concern about excess moves" in the Japanese currency.
    The yen plunged late on Monday after U.S. Treasury
Undersecretary Lael Brainard said the United States supports
Japan's effort to end deflation and stimulate growth. But she
clarified that Japan needed to honor its G7 commitment on
market-determined exchange rates. 
    But her clarification was not enough to slow the yen's
slide. On Tuesday, there was more back and forth from the G7.
    "The G7 statement was misinterpreted. The G7 statement
signaled concern about excess moves in the yen," the official
said on Tuesday. "The G7 is concerned about unilateral guidance
on the yen. Japan will be in the spotlight at the G20 in Moscow
this weekend." 
    The official was referring to a meeting of the Group of 20
finance ministers in Moscow this Friday and Saturday.
    The G7 said it remained committed to market-determined
exchange rates, adding that fiscal and monetary policies must
not be directed at devaluing currencies. 
    George Dowd, head of foreign exchange at Newedge in Chicago,
said that while he does not believe there will be any statement
condemning yen weakness, comments out of Japan for the rest of
the week could further support the Japanese currency ahead of
the G20 meeting.
    "I would be surprised to see new highs in dollar/yen above
94.07 this week and thus would look for low risk spots to
establish short trading positions in the short term," he added.
    The dollar last traded at 93.54 yen, down 0.8 
percent on the day. That was below Monday's high of 94.42 yen,
which was its strongest since May 2010. The greenback has risen
7.8 percent against the yen so far this year.
    BNP Paribas said its technical indicators suggested that the
dollar was overvalued against the yen at current levels, with
fair value estimated at 91.05 yen.
    Short-term volatility on the dollar against the
yen spiked in the options market in the wake of the G7
statement, closing at 12.988 percent, its highest in 1-1/2
    The euro fell 0.5 percent versus the yen to 125.82 
yen. On Feb. 6 it hit a nearly three-year high of 127.71 yen.
    The common currency has risen about 10 percent against the
yen, leading to strong protests from some European leaders that
a strong euro would hurt a fragile economic recovery. 
    The yen tumbled earlier in the global session after the G7
currency statement, as markets initially thought Japan had
received a green light to continue efforts to reflate its
    "Today's official response from the G7 on... currency wars
raised the stakes for this week's G20 meeting at which Japan may
find itself on the hot seat over its aggressive policies to
effectively cheapen the yen as a ticket to economic prosperity,"
said Joe Manimbo, senior market analyst, at Western Union
Business Solutions in Washington.
    The euro was up 0.3 percent against the dollar at $1.3453
, benefiting from its rise versus the yen. Gains
accelerated after European Central Bank President Mario Draghi
said talk about a currency war is way overdone. 
    Atlanta Federal Reserve Bank President Dennis Lockhart also
echoed Draghi's comments, saying that there is no currency war.
He declined to comment, however, on the yen's weakness.
    Concerns about a bailout for Cyprus, a Spanish political
scandal and Italy in the run-up to Feb. 24-25 elections are
likely to check gains in the euro. 
    Jonathan Lewis, founding principal and chief investment
officer at Samson Capital Advisors, was not particularly
impressed with the euro and has brought his roughly $7 billion
fund's "slight overweight" on the currency to "underweight."
    "There are green shoots in the euro and there are some
positive aspects, but this is not a reason to take the euro to
the higher end of the trading range," said Lewis.
    "There are some outstanding issues in the euro zone and we
think the euro in the upper $1.30s is fully valued."
    In European bond markets, Spain sold 5.6 billion euros of 
6- and 12-month debt, beating the top end of the target amount,
but paid a higher yield on the longer-term paper as a political
corruption scandal weighed on shaky confidence. 
    In the United States, the focus will be on the evening's
State of the Union address by President Barack Obama for any
signs of a deal to avert automatic spending cuts due to take
effect on March 1.

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