May 30, 2013 / 5:12 AM / 4 years ago

FOREX-Dollar steadies against the yen after sharp drop

* Yen comes away from nearly three-week high against dollar

* Fed QE tapering viewed as less imminent - strategist

* Aussie bounces against dollar and Kiwi

By Sophie Knight and Lisa Twaronite

TOKYO, May 30 (Reuters) - The dollar steadied against the yen on Thursday after falling to a three-week low as U.S. Treasury yields toppled from a 13-month high.

The dollar is broadly holding against the yen as investors waver over whether the world’s largest economy is gaining enough traction to let the U.S. Federal Reserve taper off its monthly bond buying. Some analysts say the market is starting to feel that a pullback in monetary stimulus may not be imminent.

The greenback last bought 100.93 after scraping 100.585 , its lowest since May 10 after a slump in Japanese equities spurred interest in the safe-haven yen, pressuring the dollar.

Trading in Asian time zones over the past week has been affected by volatility in the Japanese equity and debt markets, with foreign investors unwinding forex hedges on their purchases of Japanese stocks as the Nikkei tumbles further from a 5-1/2-year high hit on May 23.

“It may seem illogical (for the forex market to follow the Nikkei), but a weaker yen led to optimism for stocks before, so right now the Nikkei’s retreat has initiated a fall in the dollar-yen too,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

On Thursday, however, the dollar only eased 0.2 percent versus the yen despite a 3.6 percent fall in the Nikkei, with market participants citing bids from importers and real money as supporting the pair.

“My guess is that the trust banks need to buy dollars right now. The pension funds that were buying until the end of March have come back again and are trying to do a price-keeping operation,” said a trader at a major Japanese bank.

Volatility in the bond market has also thrown a spanner in the works for Bank of Japan Governor Haruhiko Kuroda, who said the audacious easing scheme he launched on April 4 was aimed at pushing down rates across the yield curve.

Instead, concerns about decreasing liquidity pushed the 10-year Japanese government bond yield to 1 percent last Thursday, its highest in over a year. With rising U.S. Treasury yields keeping it elevated, it hovered stubbornly at 0.900 on Thursday.

Some market participants had expected the BOJ’s easing would pressure JGB yields and send Japanese investors in search of higher yields abroad. But finance ministry data on Thursday showed they sold 1.117 trillion yen ($11.1 billion) worth of foreign bonds last week, the second straight week of net selling, as they resumed repatriating overseas investments.

“Kuroda plays a key role for ‘Abenomics’, and he has been persistently sticking with the same message since April 4. But market participants are getting frustrated and starting to distrust him - they want him to stabilise the bond market,” said Murata of Brown Brothers Harriman.

On Thursday, Kuroda said the BOJ will try to stem volatility in the JGB market to push down long-term yields.

The dollar index dropped 0.1 percent to 83.594 on Thursday, pulling away from a 3-year high of 84.498 hit a week ago after benchmark U.S. 10-year Treasury yields eased to 2.12 percent on Wednesday.

“Some of the move is because people are realising the Fed isn’t going to taper quickly, and that’s probably weighing on the dollar,” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.

Federal Reserve Chairman Ben Bernanke told a congressional panel last week that a decision on whether to scale back the Fed’s current monthly pace of $85 billion in asset purchases could come at one of the central bank’s “next few meetings” depending on economic data.

“Investors are starting to question the reality of imminent tapering.”

But most strategists expect rising expectations of QE tapering to lift Treasury yields and bolster the greenback in the months ahead. Societe Generale expects the U.S. benchmark yield to rise to 2.75 percent by the end of the year, from its current level of around 2.12 percent.

The euro inched up 0.1 percent to $1.2952 after being bolstered by a bigger-than-expected rise in German inflation. Its next target is seen as May 22’s one-week high of $1.2998.

The Australian dollar bounced from a two-year low in the previous session of $0.9528 to $0.9649, even as data showed private capital expenditure fell 4.7 percent in the first quarter.

Against the New Zealand dollar it also pulled away from a 4-1/2-year low of 1.811 struck on Wednesday to 1.1909.

The Kiwi dollar was steady at $0.8097 after the Reserve Bank of New Zealand governor said he may scale up intervention if the currency continues to climb, although he admitted their impact on the market would be muted considering the bank’s limited firepower.

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