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Yen Slides to Seven-Month Low Versus Dollar; Pound Weakens After Minutes

By Allison Bennett and Keith Jenkins - Feb 22, 2012 10:22 AM CT

The yen weakened to a seven-month low against the dollar as the extra yield offered by two-year Treasuries over Japanese bonds widened to a six-month high, increasing the attractiveness of the U.S. currency.

The yen fell for a fifth day, the most since April, after a report showed sales of previously owned U.S. homes rose to the highest in almost two years. The pound weakened after Bank of England minutes showed two policy makers voted for a larger increase in asset purchases than the amount finally agreed.

“We have seen the U.S. two-year yield gradually increasing over the past few weeks and that has been helping the move in dollar-yen,” said Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York. “Everyone was really long yen early this year and now people are selling their long positions and that is compounding the move.” A long is a bet an asset will appreciate.

The yen dropped 0.8% to 80.38 JPY/USD at Tokyo closing time, after falling to 80.40, the weakest level since July 11. Japan’s currency slid 0.9% to 106.54 JPY/EUR, after sliding to 106.57 JPY/EUR, the lowest since Nov. 14. The euro rose 0.2% to 1.3254 USD/ERU.

The spread between U.S. and Japanese two-year notes expanded to 19.05 basis points yesterday, the most since Aug. 1, according to closing-market data compiled by Bloomberg. The difference was 18.6 basis points today.

Asset Purchases

The Bank of Japan (BOJ) on Feb. 14 unexpectedly expanded its asset-purchase program to 30 trillion yen (USD 374 billion) from 20 trillion, with JPY 19 trillion set aside for government bonds. The central bank also said it will target 1% inflation “for the time being.” Consumer prices fell at a 0.2% annual rate in December, government data show.

BOJ Governor Masaaki Shirakawa has told Japanese lawmakers that policy makers set a price target to show the central bank’s resolve and it will take further steps to end deflation.

“With the U.S. economy rehabilitating, the trend in yields is up and there may be more upside” to the USD against the yen, said Lauren Rosborough, a senior FX strategist at Societe Generale SA. “When domestic investors in Japan can see an improving yield offshore, then they would be looking to sell out of yen and buy the USD.”

The Dollar Index (DXY), which tracks the U.S. currency against those of six major trading partners, climbed 0.1% to 79.206 after dropping 0.4% in the previous two days.

Sales of previously owned homes in the U.S. rose 4.3% in January to a 4.57 million annual rate, the highest level since May 2010, according to a Bloomberg News survey before the National Association of Realtors’ report today.

Yen Longs

Futures traders pared bets the yen would appreciate versus the dollar versus those it would weaken by 25,712 contracts in the week ended Feb. 14. The so-called net-longs totaled 29,459 compared to 55,171 the previous week.

Borrowing in yen to buy higher-yielding currencies such as Brazil’s real or Mexico’s peso returned 2% month-to-date according to the UBS V24 Carry Index.

UBS AG raised its forecasts for the dollar versus the yen, according to an e-mailed report. “We now target a move to 85 by the end of this year and 90 by the end of 2013,” analysts including Mansoor Mohiuddin in Singapore wrote in the note. Previous projections were 80 yen and 85 yen respectively, according to the report.

The median estimate of 49 strategists is 80 yen for the fourth quarter of 2012. The forecast has been stable since Oct. 28.

Fitch Cuts Greece

The JPY has depreciated 6.8% in the past three months, the biggest decline among 10 developed nation peers tracked by Bloomberg Correlation Weighted Indexes. The USD weakened 2.2%, and the EUR dropped 4.3%.

The euro held gains against the yen after Fitch Ratings cut Greece’s credit rating to C from CCC. A default by the nation is likely in the near term, the ratings company said in a statement today.

The 17-nation currency has strengthened over the past week after European Union finance ministers awarded EUR 130 billion (USD 172 billion) in aid to Greece and reached an accord for greater debt relief from investor representatives.

Sterling fell versus most of its 16 major peers and U.K. bonds gained as the minutes revealed Adam Posen and David Miles wanted a GBP 75 billion (USD 117.8 billion) boost in quantitative easing, instead of the GBP 50 billion supported by the other seven policy makers.

‘Dovish Surprise’

“The minutes are a dovish surprise,” said Lee Hardman, an FX strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “The market was moving to reduce the scope for further quantitative easing, which was supporting the pound, and that’s now being seen as incorrect because two members voted for bigger bond purchases. We see further downside for the pound.”

Sterling declined 0.7% to .8450 GBP/EUR. The U.K. currency slid 0.6% to USD 1.5677.

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