Yen Rises After China Central Bank Says It Bought the Currency
[COMMENT:
Can the Euro be far behind. China considers Yen way
undervalued per some story this past wk. Also don't
understand why they would *signal* this. They have
$360 million in USA treasuries]
By Ron Harui and Chris Young
Nov. 16 (Bloomberg) -- The yen gained after China's central bank said it had bought Japan's currency with its foreign exchange reserves, the world's largest at $1 trillion.
Asked whether the People's Bank of China had been buying yen, Deputy Governor Wu Xiaoling said: ``We have.'' She declined to say if the pace of buying had increased. Central banks in Russia, Switzerland and New Zealand are purchasing yen, betting the currency will rebound from a 20-year low on rising interest rates and the longest economic expansion since World War II.
``The risk-reward favors buying yen,'' said Adrian Foster, director of currency sales at Dresdner Kleinwort in Singapore. ``We've seen several central banks come out to show a tendency to highlight that they're buying.''
The yen rose to 117.85 per dollar at 12:30 p.m. in Tokyo compared with 118.02 late in New York yesterday. It gained against 13 of the 16 most-actively traded currencies, climbing to 151.23 against the euro from 151.39.
In October, the yen was at the weakest since 1985 against currencies of major trading partners, according to a monthly Bank of Japan index. It may rise to 117.20 against the dollar and 150.50 per euro today, Foster said.
``We have been holding Japanese yen in our foreign exchange reserves for many years,'' Wu said at the sidelines of a conference organized by Bank Indonesia in Bali. Last month, Wu said reserves should be invested in a range of government and corporate securities to increase returns, making no reference to switching the balance of currencies.
Clearer Signal
China's has about 70 percent of its reserves in dollars, according to the China Society of Macroeconomics, a government research institute. Currency holdings have more than doubled since 2003 as it buys dollars to prevent the yuan from rising.
``China may also diversify into euro, South Korea's won and the British pound, which are the currencies of the mainland's biggest trading partners,'' said Ha Jiming, chief economist in Beijing at China International Capital Corp., the nation's largest investment bank. ``The likelihood the dollar will weaken is getting higher.''
South Korea's won and the pound snapped three-day losing streaks. The won rose 0.3 percent to 938.70 against the dollar, the pound was at $1.8902. The euro fetched $1.2833 from $1.2831.
Central bank reserves held in yen declined to 3.6 percent at the end of 2005 from 6 percent at the end of 1999. Reserve holdings of yen fell below those in British pounds in December, dropping Japan's currency to the fourth-largest, according to the International Monetary Fund. Central banks have 65 percent of their $4.7 trillion reserves in dollars, 25 percent in euros and 4.2 percent in pounds.
`Invest Abroad'
Gains in the yen may be curbed by speculation Japanese investors will keep seeking higher yields abroad. A government report today showed domestic investors last week bought the most foreign bonds in more than a year.
``The Japanese want to invest abroad in major nations that enjoy wide interest-rate differentials with Japan,'' said Shinichi Takasaka, manager of foreign-exchange and financial products trading at Mitsubishi UFJ Trust and Banking Corp. in Tokyo. ``There's a bias for the yen to weaken'' to 119.50 per dollar and 153 versus the euro by year-end, he said.
Japanese investors were net buyers of 959 billion yen ($8.1 billion) in overseas bonds and notes during the week ended Nov. 11, according to figures based on reports from designated major investors released by the Ministry of Finance in Tokyo. That figure was the highest since the week ended Oct. 8, 2005.
The yield premium investors earn on two-year German bunds over similar-maturity Japanese bonds was 2.87 percentage points, above the average of 2.69 percentage points during the past year.
Refocus Attention
Central banks are buying yen as the world's second-largest economy emerges from more than seven years of deflation, triggering bets the Bank of Japan will raise interest rates.
Governor Toshihiko Fukui may signal plans for a rate increase this year at a news conference at 3:30 p.m. in Tokyo after the central bank kept rates on hold at a policy meeting today. The decision, which was unanimous, was expected by all 16 economists surveyed by Bloomberg News.
Fukui last week said the central bank needs to act ``in advance'' to prevent excessive capital investment and extend the nation's economic expansion. The yen had its biggest gain in a week Nov. 14 as a report showed the economy grew twice as fast as economists expected last quarter.
``The yen should find some support going into Fukui's comments,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``Fukui will help refocus the market's attention on the fact rates are likely to rise in coming months.''
The currency may reach 117.50 per dollar today, he said.
Japan's central bank will raise rates in the first quarter of 2007, according to 10 of the 16 economists surveyed this week. Four said an increase could come as soon as next month. The bank boosted borrowing costs from near zero percent in July, the first increase in almost six years.
To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net
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