Bloomberg : Dollar Is Near 2-Month High on Recovery Signs, Fed’s Outlook
By Yoshiaki Nohara and Ron Harui
Dec. 30 (Bloomberg) — The dollar traded near a two-month high against the yen on speculation the Federal Reserve will withdraw stimulus measures as the economy recovers.
The dollar may gain against the euro for a third day before a report economists said will show U.S. manufacturing expanded in December for a fifth month, adding to signs the economy is gaining momentum. The yen may extend losses against its major counterparts on prospects Japan’s struggling economy will make the Bank of Japan the last central bank to raise interest rates.
“Ongoing gains in the dollar are based on U.S. economic fundamentals and the Fed’s outlook,” said Daisaku Ueno, president at Gaitame.Com Research Institute Ltd. in Tokyo, a unit of Japan’s largest currency margin company. “It’s not that the Fed will raise rates soon, but it’s preparing tools to reduce an oversupply of dollars toward an exit. The dollar will be bought as long as this view remains intact.”
The dollar bought 92.01 yen at 9:35 a.m. in Tokyo from 92.00 in New York yesterday, when it touched 92.08, the highest level since Oct. 27. The dollar traded at $1.4335 versus the euro from $1.4354. The euro was at 131.90 yen from 132.05 yen.
The dollar has appreciated 4.7 percent versus the euro this month, trimming its 2009 decline to 2.6 percent. The greenback has fallen 30 percent against the euro this decade.
Recovery Signs
The Institute for Supply Management’s U.S. manufacturing index gained to 54.0 in December from 53.6 in November, according to the median estimate of economists in a Bloomberg News survey before the Tempe, Arizona-based Institute for Supply Management reports the data on Jan. 4. Readings above 50 signal expansion.
Demand for the yen also weakened as the yield premium offered by 10-year Treasury notes over similar-maturity Japanese bonds was 2.49 percentage points yesterday. It reached 2.53 percentage points on Dec. 24, the highest level since December 2007 based on closing prices. The wider the difference, the less appealing Japan’s debt is compared with U.S. securities.
“The dollar continues to be bought back as Treasury yields hold at high levels,” said Toshihiko Sakai, head of trading for foreign exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. “Outlooks between the Fed and the BOJ are diverging, boosting demand for the dollar-yen.”
Ten-year note Treasury yields touched 3.86 percent in New York yesterday, the highest level since Aug. 10, according to BGCantor Market Data. The yield gained 27 basis points last week.
Futures trading in Chicago showed a 60 percent chance that the Fed will raise its zero to 0.25 percent target lending rate by at least a quarter-percentage point by its June meeting, up from 48 percent odds a week ago.
Rate Downgrade
The Bank of Japan will keep its benchmark interest rate at 0.1 percent through 2010, analysts forecast in a Bloomberg News survey.
Losses in the yen may be limited on concerns that the credit ratings of Dubai banks face downgrades, spurring demand for Japan’s currency as a refuge.
Moody’s Investors Service yesterday lowered the long-term deposit ratings of Abu Dhabi Commercial Bank to A1 from Aa3 and said the outlook is negative. Moody’s actions came amid concern over the resilience of the bank’s ratings along with the “potential continued deterioration in Dubai’s operating environment, including the bank’s exposure to ongoing restructuring” of Dubai World companies’ debt.
“The downgrades may spark worries over the credit quality of other financial institutions in Dubai,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This could fuel risk aversion, which may lead to buying of the yen and the dollar.”
Dubai World, the state-owned holding company seeking to change terms on about $22 billion of debt, will present a standstill agreement to lenders in early January, three bankers who attended a presentation on the subject on Dec. 21 said.
To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.