Wednesday, May 29, 2013

Reuters: US Dollar Report: FOREX-Weak equities lift yen against the dollar

Reuters: US Dollar Report
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FOREX-Weak equities lift yen against the dollar
May 29th 2013, 09:22

Wed May 29, 2013 5:22am EDT

* Weak equities lift yen versus dollar

* Dollar index stays near 3-year high on Fed policy outlook

* Euro helped by month-end buying but still vulnerable

* Dollar hits 2-year high versus weak Australian dollar

LONDON, May 29 (Reuters) - The yen rose against the dollar on Wednesday, buoyed by weak equity markets, but speculation the Federal Reserve could reduce monetary stimulus kept the dollar near a three-year high against a basket of currencies.

Seen as a safe haven, the Japanese currency usually gains when risky assets like equities fall. Traders reported buying against the dollar by institutional investors and hedge funds.

The dollar was down 0.6 percent at 101.80 yen, with traders saying a drop in Nikkei equity futures encouraged investors to take profit on the dollar's recent rise to a four-and-a-half year peak of 103.74 yen. European shares were also down 1 percent.

Traders also said the yen was impacted because when foreign investors buy Japanese equities they hedge this investment by buying dollars against the yen. When the Nikkei falls they have to sell dollar/yen in order to unwind those hedges.

"We have had very strong increases in dollar/yen, so when equity markets get wobbly you see some consolidation," said Niels Christensen, currency strategist at Nordea in Copenhagen.

But most analysts still expect the yen to continue weakening on expectations of further hefty monetary stimulus in Japan and the dollar to strengthen because the United States is one of the few countries looking to tighten rather than loosen policy.

The dollar index dipped 0.1 percent on the day to 84.006, hurt by the dollar's drop against the yen, but it stayed near a 3-year high of 84.498 hit on May 23.

Robust U.S. consumer confidence and housing data increased talk that the Fed may end its stimulus programme early, lifting 10-year Treasury yields to a one-year peak.

The euro rose 0.25 percent to $1.2886, recovering from an earlier drop to a near one-week low of $1.28375, with traders citing demand to buy euros from companies at month-end.

But the euro was expected to remain vulnerable, potentially targeting the mid-May low of $1.2796, due to the prospect of another interest rate cut in the euro zone.

"The euro is still at the lower end of its trading range, it is still heavy and looks likely to break on the downside," Nordea's Christensen said.

"Expectations they (the Fed) will stop QE is a factor, but I think more than that it's about the fact U.S. growth outstrips that of Japan and Europe. Even if they didn't stop QE, I think the general trend for dollar buying would continue," said Daisuke Karakama, market economist at Mizuho Corporate Bank.

The dollar posted strong gains against riskier currencies, especially the Australian dollar, which was last down 0.5 percent at $0.9571, having earlier broken through support at $0.9550 to hit a 2-year low of $0.9537. Traders said it could extend falls if it breaks below an options barrier at $0.9500.

The Australian currency has been hurt recently due to a weakening economy, worries about the potential for more interest rate cuts and concerns about signs of a slowdown in China.

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