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Forex: Yen Surges Up As Most Asian Stocks Slide; Hits 14-year High Against Dollar
11/26/09 01:58 am (EST)

(RTTNews) - Thursday in Asia, the yen surged up against its major counterparts as a decline in most Asian stocks boosted demand for the safe-haven Japanese currency.

Japan's 0.1% interest rate help speculators get funds with low borrowing costs and invest in one with higher returns, earning the spread between the two.

So, an unwinding of carry trade results in traders liquidating their investments and scrambling for yen to repay their yen-denominated loans, which pushes up the value of the Japanese currency.

Most Asian stock markets dropped today as mostly positive economic news in the U.S. failed to inspire investors.

Gold, meanwhile, hit a new record high of $1,196.8 an ounce as investors increased their bets on commodities to hedge against the sinking dollar.

Japan's Nikkei 225 index lost 0.6%, Australia's S&P/ASX 200 dropped 0.4%, China's Shangai Composite index declined 2.65%, Hong Kong's Hang Seng slipped 1.6% and South Korea's Kospi fell 0.8%.

The yen soared to a 14-year high against the dollar, 6-week high against the pound and 7-week highs against the euro and the franc.

Japan's finance minister Hirohisa Fujii said today that he is watching the yen's upward trend "very carefully," suggesting he is becoming more concerned about the currency's rise, after it hit a 14-year high against the dollar. The government would take appropriate measure if currency moves are 'abnormal', he said.

Fujii said yesterday that the dollar's weakness is spurring the yen's advance. Today, he said "a strong U.S. dollar is in their national interest. There is no change in our support for that."

A stronger yen threatens Japan's still-embryonic recovery, by making Japanese exports more expensive abroad while reducing the value of revenues earned overseas when converted into the domestic currency.

Also, a rising yen is emerging as a major headache for the Democratic Party of Japan-led government, which is already beset with problems ranging from deflation to weak domestic job markets that analysts say could snuff out a nascent recovery.

Japan's economy relies heavily on exports for growth as economic uncertainties mean its consumers and businesses are reluctant to spend or invest.

Japanese authorities haven't stepped into the currency market since the first three months of 2004, when it sold a record 14.8 trillion yen ($171 billion). Fujii, who assumed his post in September, spurred some of the yen's gains by saying he opposed "easy intervention," only later to tone down his remarks by saying Japan will act if currency moves are "abnormal or disorderly."

During Asian deals on Thursday, the yen jumped to 86.31 against the U.S. dollar, its strongest level since July 31, 1995. If the yen gains further, it may target the 83.4 level. At yesterday's close, the dollar-yen pair was quoted at 87.36.

The dollar's decline sent gold higher, as investors sold greenbacks to buy the metal. Gold futures hit a 26-year high in Tokyo trading today.

The dollar's slide was also triggered by remarks, contained in the recently released minutes of the Federal Open Market Committee's last meeting, which were widely interpreted to mean that the Fed is not averse to letting the greenback depreciate in an orderly fashion.

This prompted such players as hedge funds and bank traders to aggressively sell dollars for yen. It also encouraged investors to dump dollars to buy higher-yielding currencies and commodities like gold, a strategy known as the dollar carry trade.

As a result, the dollar tumbled against most currencies.

After hitting a 5- 1/2 -month low of 101.46 against the dollar on April 06, 2009, the Japanese yen advanced 13% and reached an 8- 1/2 -month high of 88.03 on October 07. Although the yen eased 5% thereafter, it rebounded after touching a 5-week low of 92.34 on October 27. Since then, the yen has appreciated 7% against the dollar.

The yen that closed yesterday's trading at 145.96 against the British pound soared to a 6-week high of 143.89 in Asian deals on Thursday. The next upside target level for the yen is seen at 139.8.

The Bank of Japan's board members said that the global financial markets remain at risk amidst uncertain conditions, minutes from the October 30 monetary policy meeting revealed earlier today.

The board added that the recovery for the U.S. economy is likely to lag behind the rest of the world, reiterating the need to take appropriate and flexible steps in a timely fashion.

At the meeting, the board unanimously decided to maintain the uncollateralized overnight call rate at 0.1 percent, as expected. Also, the board decided to stop outright purchases of commercial papers and corporate bonds at the end of 2009 as the central bank's assessment showed a marked improvement in conditions.

Thus far, the yen has gained more than 6% against the U.K. currency from a 1- 1/2 -month low of 153.28 hit on October 23.

In Asian trading on Thursday, the yen strengthened to a 7-week high of 130.45 against the euro. This may be compared to yesterday's close of 132.23. On the upside, 129.1 is seen as the next target level for the yen.

The euro came under heavy selling pressure yesterday after a monthly survey report from the Nuremberg-based GfK Group showed that German consumer confidence for December unexpectedly dropped for a second month as economic and income expectations dropped moderately on an expected rise in unemployment.

The yen has been in an upward channel against the euro after it touched a 2- 1/2 -month low of 138.51 on October 26. Since then, the yen has climbed 6% against the euro.

The yen surged up to a 7-week high of 86.82 against the Swiss franc during Asian deals on Thursday. If the yen edges up further, it may find resistance around the 85.6 level. The franc-yen pair was worth 87.70 at yesterday's close.

The yen that plunged to a 1-year low of 91.60 against the franc on October 26 has gained 5% since then.

Looking ahead, the Italian business confidence for November and trade balance for October and the Euro-zone October M3 money supply reports are expected in the upcoming hours.

The U.S. markets will be closed today in observance of 'Thanksgiving holiday'.