Dollar Seen Gaining Against Yen on Talk Japanese Government Will Buy
Bonds
(Repeats story originally published Friday.)
New York, Feb. 6 (Bloomberg) -- The dollar is expected to
rise against the yen in coming days on expectations Japan will
try to lower bond yields, reducing Japanese investors' incentive
to bring home overseas earnings and cooling demand for yen.
Japanese Finance Minister Kiichi Miyazawa said he wants the
Bank of Japan to buy more 10-year government bonds in an attempt
to halt a climb in long-term interest rates that threatens to
worsen the nation's recession by driving up borrowing costs.
''If they bring interest rates back down, weaken the yen and
stimulate the economy, the Japanese have some hope of pulling
their economy back from the brink,'' said Lee Thomas, who helps
manage $7.5 billion in global bonds at Pacific Investment
Management Co., based in Newport Beach, California. Allowing bond
yields to rise ''is a mistake,'' he said.
This week the dollar fell 3 percent against the yen to wind
up at 112.82 yen. It rose 0.9 percent versus the euro, leaving
the single currency at $1.1265.
The euro, down 3 percent from it initial rate set Dec. 31,
will likely extend that slide next week amid signs of robust
growth in the U.S. and slowing growth in Europe. Many traders and
analysts predict the European Central Bank will lower interest
rates within the next few months, which would widen interest rate
differentials in favor of the dollar.
''We think the dollar will grind higher versus the euro,''
said,'' said James Culnane, a currency trader at Norddeutsche
Landesbank. ''The U.S. economy is very strong. Barring a global
meltdown, it rules out any kind of rate cut here and we're
expecting lower rates in Europe.''
Narrow Range
Since the start of the year, the dollar has generally
hovered between 110 yen and 116 yen, dropping once to 108.22, at
which point the Bank of Japan intervened to sell the yen and
boost the U.S. currency. Concern that Japan will step in again
has kept the dollar above 110 yen.
Higher bond yields in Japan and dollar-selling by Japanese
firms wanting to bring home profits from abroad have kept the
dollar from rising much above 116 yen. Also, Japan's bulging
current account surplus has supported the yen as it leaves more
foreign currency in the hands of Japanese companies to sell for
yen.
More evidence of strong U.S. growth came Friday as the Labor
Department reported the economy added 245,000 jobs in January,
well above forecasts for a gain of 138,000. The unemployment rate
stayed put at 4.3 percent while economists surveyed by Bloomberg
News had expected it to rise 0.1 percent to 4.4 percent.
''The dollar is in demand,'' said John Hazelton, a currency
trader at PNC Bank Corp. in Pittsburgh and a buyer of dollars.
''This is a positive number for the economy. I can't think the
Fed is going to be lowering rates anytime soon'' and, while he
said a rate rise isn't imminent, ''the Fed's hand may be forced
if we continue to see such strong numbers.''
Strong growth gives the Federal Reserve more scope to raise
interest rates. Higher rates help the dollar because they make
the return on dollar deposits and bonds more attractive. The
benchmark U.S. lending rate is at 4.75 percent.
Japanese Yields
The yen gained 3 percent this week on expectations rising
yields would prompt Japanese companies to buy yen to invest more
of their foreign earnings in domestic bonds.
Japanese 10-year bond yields tripled in the last four months
as investors braced for a flood of debt sales to fund tax cuts
and public works spending. That drove up interest rates on
everything from corporate bonds to mortgages, threatening to
delay the end of the economy's worst recession in 50 years.
In Tokyo, the benchmark No. 203 bond maturing in 2008 fell,
boosting the yield 20 basis points to 2.37 percent, just below
the record high 2.44 percent reached Tuesday.
Miyazawa's comments came out about 5 p.m. Friday in Tokyo,
after trading had ended. Since then, Japanese bond futures in
London surged, with the March contract rising 1 point to 127.70,
the maximum allowed on the London International Financial Futures
and Options Exchange. That suggests yields will drop.
''The Bank of Japan should consider twist operations,'' said
Miyazawa, a reference to altering the ratio of short- and long-
term debt held as assets. While he didn't give specifics, the
bank could sell short-term financial bills and switch into bonds
with maturities of seven years or more, for example.
''Lower yields are generally bad for a currency, especially
when they are already about 2 percent lower than anywhere else in
the world,'' said Malcolm Gilroy, who helps manage $100 million
in global bonds at Laketon Investment Management in Toronto.
PIMCO's Thomas predicted the dollar would climb to ''at
least'' 130 yen this year.
Slowdown in Europe?
Recessions in Asia, Latin America and Russia have crimped
European exports, and many people are doubtful the region's
average 10.8 percent unemployment rate will fall significantly.
Last month, the European Commission said the euro-11
economies will likely expand a combined 2.4 percent this year,
down from an October forecast of 2.6 percent growth.
Many economists expect the European Central Bank to lower
borrowing costs in the next few months to counter the danger of
deflation, a spiral of contracting output and falling prices. The
European benchmark interest rate is at 3.0 percent.
''I don't like what I see in Europe, and I think they've got
to cut interest rates,'' said Laketon's Gilroy. He said while
he's slightly overweight in euro holdings against the J.P. Morgan
global index, he's re-evaluating that position. ''I can see the
euro falling to $1.05 in six months,'' he said.
Not everyone's pessimistic on Europe. Jay Bryson,
international economist at First Union Corp. in Charlotte, North
Carolina, says Europe's slump may soon be over and predicts the
euro could bounce back to $1.1450 next week. Bryson cited
stabilization in German manufacturing orders and rising European
consumer confidence.
Consumer confidence among the 11 countries using the euro
rose to a reading of 0, the highest since August, up from minus 1
in December, indicating the number of pessimists and optimists
was balanced, according to Eurostat, the commission's statistics
office. Consumer confidence in France rose to minus 7 in January,
the highest since records began in 1987.
''Things may have hit a bottom in the euro zone,'' Bryson
said.
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