Dollar Approaches 14-Year Low Against Yen on Fed Rate Outlook

By Oliver Biggadike and Bo Nielsen

Nov. 25 (Bloomberg) -- The dollar approached a 14-year low against the yen as the Federal Reserve’s signal that it will tolerate a weaker greenback encouraged investors to buy higher- yielding assets outside the U.S.

The U.S. currency extended its drop versus the yen after breaking 88 for the first time in 10 months. The Swiss franc appreciated to parity versus the dollar for the first time since April 2008. Russia’s central bank plans to add Canadian dollars to its reserves to reduce a reliance on U.S. currency.

“The strong dollar policy is not a policy that the dollar should be strong now,” said Lauren Rosborough, a senior currency strategist at Westpac Banking Corp. in London. “It’s a policy that the dollar will strengthen, reflecting an improving economy.”

The dollar dropped 0.9 percent to 87.72 yen at 10:35 a.m. in New York, from 88.50 yesterday, after falling to 87.39, the lowest level since Jan. 21. On that day, it touched 87.13, the weakest since July 1995. The dollar depreciated 0.6 percent to $1.5057 per euro, from $1.4968 yesterday, after reaching $1.5096, the weakest level since August 2008. The euro fell 0.3 percent to 132.04 yen, from 132.47.

South Africa’s rand gained 1.5 percent to 7.3507 versus the dollar and the Swedish krona appreciated 0.3 percent to 6.8887 on speculation investors will increase carry trades, in which they buy higher-yielding assets with amounts borrowed in nations with low interest rates. The benchmark lending rate of zero to 0.25 percent in the U.S. makes its currency popular for funding such transactions.

Stronger Franc 

The Swiss franc strengthened as much as 0.9 percent to 0.9994 per U.S. dollar a day after Swiss National Bank President Jean-Pierre Roth said in Geneva yesterday that central banks may “soon” start withdrawing unconventional measures as the global economy gains strength.

Canada’s dollar climbed to a one-week high after Russia’s central bank said it will add the currency to its reserves and may include more currencies.

“Technical preparations for transactions in Canadian dollars are under way,” Sergei Shvetsov, the bank’s financial operations head, told legislators in Moscow today, in remarks confirmed by a Bank Rossii official. “Then there may be one, two other currencies, and that’s it.”

The Canadian currency advanced as much as 1.2 percent to C$1.0451 per U.S. dollar, the strongest level since Nov. 18.

Gain in Aussie 

The Australian dollar increased 0.8 percent to 92.68 U.S. cents after the Reserve Bank’s Deputy Governor Ric Battellino said the economy has entered a “new upswing,” fueling speculation the central bank will raise rates for a third month in December. He told a conference in Melbourne that “it is reasonable to assume that we will see this growth extended for a few more years yet.”

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, fell as much as 0.9 percent to 74.399, the weakest level since August 2008. It has dropped 2.2 percent this month.

Fed officials indicated after their Nov. 4 meeting that the benchmark lending rate will remain near zero for an “extended period” as long as inflation expectations are stable and unemployment fails to decline. Policy makers said that “some negative side effects might result from the maintenance of very low” short-term interest rates.

“With the FOMC minutes reminding the market how long one will wait for a U.S. rate hike and the RBA’s Deputy Governor Ric Battellino making an Australian hike next week look increasingly certain, the night belonged to the Australian dollar, with the U.S. dollar out in the cold once again,” analysts from the Royal Bank of Canada including London-based Adam Cole wrote in a note today.
Fujii on Yen
Japanese Finance Minister Hirohisa Fujii said the yen is gaining because of weakness in the dollar.
“It’s all because of the U.S. dollar,” Fujii told reporters today in Tokyo, without elaborating. He has said low interest rates in the U.S. are behind the currency’s drop.

The yen has advanced 7.4 percent against the dollar in the past three months. Some of the gains were spurred by Fujii’s remarks that he opposed “easy intervention” into markets to weaken the yen. He has since toned down his comments, saying Japan will act if the currency moves in an “abnormal or disorderly” way.
Japanese authorities haven’t stepped into the currency market since the first three months of 2004.
The decline in the greenback against the yen is “looking like the line of least resistance for further dollar weakness against the majors,” said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd. “Speculative investors are jumping on the move now too.”

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net
Last Updated: November 25, 2009 10:36 EST