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Yen Falls as Currency Volatility Drops to Three-Year Low; Euro Strengthens

Friday, 24 February 2012 | 12:19
The yen fell to a three-month low against the euro as foreign-exchange volatility at its lowest since August 2008 and signs of global growth prompted buying of higher-yielding currencies.
South Africa’s rand and Norway’s krone climbed before a report that economists predicted will show new U.S. homes sales rose to a nine-month high in January. The euro rose against the dollar for a third day as officials prepared to seek support to tackle the debt crisis when Group-of-20 nations meet tomorrow. The yen weakened against all its major peers, extending its drop against the dollar to 3.8 percent since the Bank of Japan unexpectedly expanded its asset-purchase program on Feb. 14.
“We are moving gradually into a risk-taking environment,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “The policy stance of the Japanese government, low volatility and signs of economic recovery are putting the yen on the defensive.”
The yen fell 0.9 percent to 107.97 per euro at 6:31 a.m. New York time, after reaching 107.99 yen, its weakest level since Nov. 7. It’s poised for a 3.3 percent drop since Feb. 17, the third-straight weekly decline. Japan’s currency slid 0.6 percent against the dollar to 80.50 yen. The euro rose to more than $1.34 for the first time since Dec. 9, trading 0.3 percent higher at $1.3413.
Exchange-Rate Swings
The implied volatility of three-month options on G-7 currencies as tracked by the JPMorgan G7 Volatility Index (JPMVXYG7) fell to 9.71 percent, the least since Aug. 8, 2008, as options traders scaled back the risk of large exchange-rate swings. Lower volatility makes investments in currencies with higher benchmark rates more attractive because the risk in such trades is that market moves will erase profits.
The yen stayed lower after Moody’s Investors Service Senior Vice President Thomas Byrne said today the ratings company hasn’t reached the point where it needs to downgrade Japan’s sovereign debt.
The BOJ said this month it would expand its asset-purchase program to 30 trillion yen from 20 trillion, with 19 trillion yen set aside for government bonds. The central bank also said it will target 1 percent inflation “for the time being.”
The euro headed for a seventh-straight advance against the yen, the longest run since January 2010 after demand was boosted by the prospect that G-20 officials meeting this weekend may discuss committing further resources to Europe’s debt crisis.
IMF Funding
Japanese Finance Minister Jun Azumi said today Europe will be the central topic at the meeting in Mexico City. Japan is considering contributing $50 billion to the International Monetary Fund’s European rescue package, the Asahi newspaper reported yesterday, without saying where it obtained the information.
Japan’s currency has tumbled 6.1 percent in the past month, the biggest loser among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The dollar weakened 2.2 percent and the euro rose 0.8 percent in the same period. Norway’s krone jumped 3.5 percent, the indexes show.
The krone for a third day versus the greenback before a report that will show sales of new homes in the U.S. rose 2.6 percent in January. Norway’s currency gained 0.5 percent to 5.5851 per dollar.
“The U.S. data is improving and no doubt that’s adding to the positive sentiment, but higher equity markets in the States equals higher risk currencies,” said Tony Allen, global head of foreign-exchange trading in Sydney at Australia & New Zealand Banking Group Ltd.
Stocks Advance
The Stoxx Europe 600 Index of equities rose as much as 0.5 percent today and futures on the Standard & Poor’s 500 Index climbed 0.3 percent.
The rand gained 1 percent to 7.5834 per U.S. dollar, strengthening 2 percent since Feb. 17. The Canadian dollar was little changed at 99.70 cents per U.S. dollar. It reached 99.07 cents on Feb. 20, the strongest since Oct. 28.
Barclays Plc recommended investors bet on the depreciation of the euro against an equally-weighted basket of the dollar and Norway’s krone before a three-year loan offering from the European Central Bank scheduled for next week.
A second three-year longer-term refinancing operation “is likely to be more of a liquidity supply shock and weaken” the euro, Paul Robinson, global head of foreign-exchange research at Barclays in London wrote in a research note yesterday.
Financial institutions will ask the ECB for 470 billion euros in three-year funds for allotment on Feb. 29, the median of 28 estimates in a Bloomberg survey showed.
Source: Bloomberg
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