NEW YORK (Reuters) - The dollar fell against the yen on Monday and could test its all-time lows as Japanese insurers and companies repatriated funds to help pay claims and reconstruction costs in the wake of the country’s devastating earthquake.
The dollar had dipped as low as 80.60 yen overnight, less than a yen from the record low of 79.75 hit in 1995. One-month dollar/yen volatility jumped a four-month high around 11.7 percent from about 8 percent before the quake, suggesting expectations for large price fluctuations.
Analysts said the yen could rise further in the near term, potentially testing its previous record, though they cautioned against betting aggressively on yen strength.
The currency may come under pressure in the medium to long run as the earthquake will likely force the Bank of Japan to keep its easing policy for longer to help the economic recovery.
“We are neutral on the yen. In the short term, there’s going to be some repatriation. But from a long-term perspective, Japan will go through some very difficult times, which means lower interest rates and a lot of stimulus for the economy,” said Jonathan Xiong, director and global investment strategist at Mellon Capital Management in San Francisco.
“Currency is a relative game and this is a huge step back for Japan. Ultimately, fundamentals will drive the return of the currency and a lot of them don’t bode well for yen,” he added. Xiong is part of a team that oversees $28.6 billion in assets.
The dollar last traded 0.3 percent lower at 81.67 yen. It earlier rebounded to a high of 82.43 yen after the Bank of Japan doubled its asset-buying scheme to 10 trillion yen and supplied record funds to banks in an effort to stabilize an economy shaken by Japan’s biggest earthquake on record.
Traders noted support around 80.25, the November trough. Strong long-term support stands at the psychologically important 80.00 barrier and the 79.75 historical low.
Michael Hart, director of FX strategy at Roubini Global Economics in London, said the yen was set to rise before the quake, a trend that could continue in coming weeks as risk-averse households keep money home and the Japanese government sells some of its $1 trillion stash of U.S. Treasuries to help pay for rebuilding.
Since the yen rose some 12 percent against the dollar last year, Hart said subsequent gains may not be as sharp and swift as those seen after a 1995 Japanese earthquake, when the currency added some 20 percent in about three months.
But “yen strength is probably here to stay,” he said.
One short-term limit to yen gains could be official intervention if the currency rises above 80 per dollar, analysts said. Yen strength hurts Japan’s exports.
The euro last traded at $1.3994, up 0.6 percent, after policymakers agreed at a meeting in Brussels to boost a euro zone bailout fund and make loans cheaper.
It touched as high as $1.4003 on trading platform EBS after comments from Eurogroup Chairman Jean-Claude Juncker that there had been a significant increase in inflation.
Expectations the European Central Bank will raise interest rates next month have boosted the euro in recent sessions, though analysts said it may struggle above $1.40 amid worries about the region’s heavily-indebted economies.
“I feel the euro is too strong around $1.38-$1.40,” Roubini Global’s Hart said. “If you look at two-year spreads, the last time they were this wide, the euro was at $1.45, so it’s not just about rates. There are still unanswered questions (about the debt crisis).
The German two-year bund yielded 104 basis points more than a comparable Treasury note.
U.S. Federal Reserve policymakers meet on Tuesday and investors will closely watch the Fed’s assessment on unemployment and the economy in general.
“The Fed is going to look for more signs of decreasing unemployment,” Xiong said.
Mellon is bearish on the dollar, but Xiong said that could change as investors begin to price in rate hike expectations in the second and third quarters.
“That could be the turning point for the dollar,” he added.