Saturday, December 11, 2004

Bloomberg: Dollar Posts Its Biggest Weekly Advance Against the Yen Since February

Dollar Posts Its Biggest Weekly Advance Against the Yen Since February

Dec. 10 (Bloomberg) -- The dollar posted its biggest weekly gain since February against the yen on signs Japan's economy is stalling while economists raise estimates for U.S. growth. The dollar also rallied this week against the euro and 14 other major currencies.

The U.S. currency reached an almost five-year low against the yen on Dec. 2, sparking concern Japan's exports will slow. Japanese government data Dec. 8 showed weaker-than-expected economic growth last quarter, and the Bank of Japan's Tankan survey next week is forecast to show waning business confidence.

``There's no reason to suspect that Japan can now generate a domestic growth story,'' said Steve Pearson, head of currency strategy at HBOS Plc in London. ``Just when we thought there was no risk in being short dollars, the market reminds you it can go up and down.'' Short positions are bets on a decline in price.

The dollar surged 3.1 percent against the yen this week, to 105.22 yen at 5 p.m. in New York from 104.68 late yesterday, according to electronic currency-dealing system EBS. It climbed 1.7 percent this week to $1.3223 per euro, its largest increase in three months.

This week's gain against the yen is the biggest since Japan was selling a record amount of its currency in the first quarter to stem the yen's climb. Japan hasn't sold yen since March. The euro reached 139.85 yen today, the strongest since June 2003.

Hedge funds and other speculators reduced bets on further euro gains for the fourth straight week this week, data from the Commodity Futures Trading Commission showed today.

Higher Forecasts

Gains for the dollar this week accelerated after European and Japanese officials said its slide was unwelcome. Japan grew at a less-than-expected 0.2 percent annual clip last quarter, government data showed. French industrial output dropped for the third month in four in October, the government said today.

In the U.S., economists raised their growth forecast for this quarter, according to a monthly survey by Bloomberg News. A 3.8 percent annual rate of expansion is forecast for gross domestic product in October through December, up from the 3.5 percent projected last month.

``Money's going to go where it can get the highest growth and it's not Europe or Japan,'' said Joseph Portera, managing director overseeing $8 billion of global fixed income at Mackay- Shields Financial Corp. in New York. The stronger yen ``certainly hurts their competitiveness globally,'' just as the higher euro crimps European growth, he said.

The U.S. currency fell to a record $1.3470 per euro on Dec. 7. It dropped to 101.83 yen this month, the weakest since January 2000.

Fed Expectations

Expectations for higher U.S. interest rates may also help the dollar. The Federal Reserve may lift its benchmark rate by a quarter percentage point on Dec. 14, for the fifth boost this year, to 2.25 percent, the median estimate in a Bloomberg survey shows. The European Central Bank's benchmark is now 2 percent.

The dollar had fallen the past 10 weeks against the yen and eight straight weeks against the euro.

``The market had moved a long way in a short period of time,'' said James McCormick, London-based head of foreign- exchange research at Lehman Brothers Holdings Inc. ``We really needed to see a pause.''

Lehman, the most accurate forecaster of exchange rates last quarter in a Bloomberg survey, predicted the dollar will resume its decline, reaching $1.40 per euro next year.

Japanese Prime Minister Junichiro Koizumi yesterday in Tokyo said the yen's climb has been ``unwelcome.'' ECB policy makers, including Jose Manuel Gonzalez-Paramo and Nout Wellink, said the euro's gain to a record threatens the region's economy.

Officials' Comments

``Finance officials want to see the pace and the volatility of the dollar's move diminished,'' said Thomas O'Malley, head of global currency fund management in San Francisco at Barclays Global Investors, with more than $1 trillion of assets.

The dollar's decline has eroded the purchasing power of revenue earned by oil-exporting countries.

``We should consider the dollar depreciation in changing the price band floor'' set by OPEC for oil, Iranian oil minister Bijan Namdar Zanganeh said in an interview today before a meeting in Cairo of Organization of Petroleum Exporting Countries.

A stronger currency euro damp European growth by making exports more expensive. Industrial production in France, the euro- region's second-largest economy, fell 0.7 percent in October. Exports account for a fifth of the 12-nation euro-region's economy.

The quarterly Tankan index of confidence among large manufacturers may fall to 23 in December from a 13-year high of 26 in September, according to the median of 20 forecasts in a Bloomberg survey. The report is scheduled for release Dec. 15.

Current-Account Deficit

The dollar's slide may resume on speculation U.S. officials favor a weaker currency to narrow the deficit in the current account, the widest measure of trade.

Because of the U.S. deficits, ``it's really hard to be long- term bullish on the dollar,'' Portera at Mackay-Shields said. He said he may buy euros if it goes below $1.30.

A government report will probably show on Dec. 16 that the U.S. current-account deficit reached a record $171 billion in the third quarter, according to the median forecast. A widening gap means an increasing amount of dollars need to be converted into other currencies to pay for imports.

U.S. Treasury Secretary John Snow suggested in an interview on Dec. 3 he wouldn't attempt to counter the dollar's slide. ``Markets can overshoot and undershoot, and they often do, but the virtue of markets is they're self correcting,'' he said.

Japan's economy grew at a 0.2 percent annual pace in the third quarter, less than the median forecast of 1.1 percent, the government said Dec. 7.

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