Yen Drops From 15-Year High on Speculation Japan Will Intervene

By Bo Nielsen and Yoshiaki Nohara
Aug. 25 (Bloomberg) -- The yen retreated from a 15-year high versus the dollar on speculation Japanese authorities will act to stem gains that risk derailing the nation’s recovery.
The yen also fell from the strongest in nine years against the euro after Japanese Finance Minister Yoshihiko Noda pledged “appropriate action” on the currency and the Nikkei newspaper said the Bank of Japan is considering further monetary easing.
The euro rebounded from a six-week low against the dollar after a report showed German business confidence unexpectedly increased to a three-year high in August.
“We’re seeing a slight tightening of the intervention rhetoric out of Japan,” said Paul Robson, a London-based currency strategist at the Royal Bank of Scotland Group Plc.
“It’s only natural that after pushing the yen to extreme levels yesterday, people will pull back and digest the news.”
Japan’s currency weakened to 84.64 yen per dollar as of
9:132 a.m. in London from 83.90 in New York yesterday, when it reached 83.60, the highest since June 1995. The yen depreciated to 107.56 per euro from 105.97, after yesterday reaching 105.44, the strongest since July 2001.
The yen may reach 85 per dollar before traders start to buy it back, Robson said. The Stoxx Europe 600 Index of European equities was little changed after dropping 1.7 percent yesterday, reducing the demand for the relative safety of the yen, the dollar and the Swiss franc.
The dollar traded at $1.2708 per euro from $1.2627 yesterday, when it touched $1.2588, the strongest since July 13.
The Swiss franc climbed to a record high of 1.2987 per euro before falling to 1.3055, from 1.3044.

Bank of Japan

“We have to take appropriate action when necessary, though I plan to continue to watch currency movements very closely with great interest,” Noda told reporters in Tokyo today. “My basic understanding is that movements have been one-sided.”
A Bank of Japan program that provides funding to lenders at
0.1 percent may be expanded to 30 trillion yen ($356 billion) from 20 trillion yen, and the duration of the loans may be increased to six months from three, Nikkei said today.
“Japan rhetoric shifts but markets will not be convinced,” Derek Halpenny, European head of foreign exchange at Bank of Tokyo-Mitsubishi UFJ in London, wrote in a research note to clients today. “Unilateral intervention, especially in today’s economic climate, would be doomed to failure. The reality is that the direction of the yen is at the mercy of events abroad.”
The yen surged yesterday even after Prime Minister Naoto Kan told reporters “steep currency gains are undesirable” and Noda said recent foreign-exchange rate movements have “clearly” been one-sided.

Intervention History

Noda said today he didn’t discuss any specific measures to combat the yen’s advance when he met with Kan, while saying he was asked to monitor financial markets closely.
Japan hasn’t intervened in the currency markets since March 16, 2004, when the yen was at about 109 per dollar. The Bank of Japan sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. The currency ended 2004 at 102.63 to the dollar. Japan last bought the currency in 1998, purchasing 3.05 trillion yen as the exchange rate weakened to 147.66.
Global risk aversion this year has driven gains in the yen, which tends to strengthen during economic turmoil as Japan’s trade surplus makes it less reliant on foreign capital. A rising currency hurts Japanese exporters by making their goods more expensive to foreign buyers and reducing the value of profits earned abroad.

Germany’s Ifo

Japan’s large manufacturers expected the yen to average
90.16 in the year ending March 2011, according to the central bank’s Tankan survey released on July 1.
The euro rose after the Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, rose to 106.7 from 106.2 in July. Economists expected a drop to 105.7, according to the median of 36 forecasts in a Bloomberg News survey.
Sales of existing homes in the U.S. plunged at a record pace in July, the National Association of Realtors said yesterday. Purchases of new houses held at an annual pace of 330,000 in July from the prior month, according to a Bloomberg News survey of economists before today’s report by the Census Bureau.
“The divergence between U.S. and European data is just temporary,” said David Deddouche, a foreign-exchange strategist at Societe Generale SA in Paris. “The euro selloff should consolidate in the short term, and then the downward trend will resume.”
The dollar has advanced 4.3 percent this year while the euro has declined 9.2 percent, according to Bloomberg Correlation-Weighted Currency Indexes. The yen has climbed 16 percent, the biggest gain among developed-world counterparts.