The US dollar is at its highest level against the yen since October 2008 as signs of faster US economic growth fuel belief in the markets that the Federal Reserve will start to scale back its $85 billion of monthly asset purchases at the FOMC meeting tomorrow and Wednesday.
The USD posted gains last week after retail sales showed the fastest increase since June and a Fed official declared that the odds of tapering bond purchases have increased along with improvement in the labor market.
“Dollar gains will probably come from US growth, which pushes up US yields more than expected”, says Geoffrey Yu, a senior currency strategist at UBS AG in London. “The biggest theme will be US tapering. I still like to be long dollar-yen. I know that’s the consensus view, but all the risks are still to the upside.”
The most meaningful event in the United States this week will be the Federal Open Market Committee meeting. Outgoing chairman Ben Bernanke and his colleagues come together for the final time this year tomorrow and will have in hand recent data indicating that more Americans are finding work and consumer spending is heading up.
The fluctuations in the dollar-yen pair reflect the markets’ perception that US and Japanese monetary policies are heading on divergent paths. The Fed is set to unwind its stimulus programmes of the post-crisis era, while the Bank of Japan has reiterated its commitment to continued easing. To fight Japan’s decades-long economic stagnation, the BoJ announced in April an unexpected and unprecedented $1.4 trillion of economic stimulus over the next two years, causing the yen to gradually slide and bond yields to fall to record lows.
Meanwhile, in the United Kingdom November price data will probably show inflation is cooling toward the Bank of England’s target. Sterling last week retreated from a two-year high against the USD and posted the weakest level in a month against the euro. Policy will be tightened “only when we are well along the road to recovery”, Bank of England chief economist Spencer Dale said on Friday.
“The market has moved over the last week to pare back expectations of the tightening in the UK”, observes Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi in London. “Ultimately the Bank of England is trying to reinforce its forward guidance message that rates are likely to remain lower for some time even though the recovery is robust.”
In contrast, the strength of the euro is being seen by Eurozone policy-makers as an indication of the region’s emergence from its debt crisis so long as it doesn’t move above $1.40, according to Pacific Investment Management strategist Richard Clarida.
“After the near-death experience of the euro crisis in 2012, I think European officials are pleased with the euro in the $1.3000 range”, Clarida added. “If we get north of $1.4000, there will be a lot of jawboning pressure both from European Central bank officials and others. I really think the range of the last several years of $1.4000 to, say, $1.2500 is what we are looking at.”
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