Dollar heads for 11th weekly gain but tensions grow
New York (Sept 26) The dollar was back on the front foot against the yen and several other major currencies on Friday, on track for an 11th straight weekly gain that extends its longest winning streak since its 1971 free float.
Concerns about the U.S. currency's 7 percent rise in trade-weighted terms since early July surfaced in a sell-off on New York stock markets on Thursday, and the rally that most investment houses expect to continue through next year may not be a smooth affair.
But the growing divergence of economic fortunes, and market interest rates, on either side of the Atlantic continues to drive a seismic shift that has some major banks forecasting a 15-20 percent fall for the euro over the next year.
After a retreat for the dollar overnight, Japan's welfare minister pushed the yen lower by quelling speculation that reform of the country's giant pension fund would be delayed. The changes are expected to result in more investment being channelled into Japanese equities and overseas assets and have hurt the yen.
"Its Friday and so we may see some consolidation but in general the dollar has broken through a number of long-term levels so there's scope for us to go further before we meet much resistance," said Neil Mellor, a strategist with Bank of New York Mellon in London.
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"Against the euro we have a forecast in the low $1.20s for a year's time, but the way things are going we could get there fairly quickly."
The euro was steady in early European trade at $1.2749, off an almost two-year low of $1.26955 hit on Thursday. The dollar index, measuring it against a basket of currencies, was just below a four-year high of 85.485 hit on Thursday.
Banks said that "long" positioning behind the dollar showed the extent of conviction that it would continue to rise, but one big question for the rally will be the fallout in other markets of some of the preconditions for a stronger U.S. currency.
The prospect of less monetary stimulus and higher U.S. interest rates drove a shocking sell-off on emerging markets at the start of this year and Wall Street's losses overnight had similar roots.
The dollar stumbled on that but it recovered against the yen at least after Japan's Welfare Minister Yasuhisa Shiozaki denied media reports that suggested Tokyo would delay reforming its $1.26 trillion Government Pension Investment Fund (GPIF).
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Traders were watching for any sign of Japanese officials trying to check the weakening in the yen, after Prime Minister Shinzo Abe said earlier this week that he would carefully watch the impact of the yen's fall to a six-year low.
"Many in the market feel the authorities won't start verbal intervention until dollar/yen rises above 110," said Masashi Murata, a senior currency strategist at Brown Brothers Harriman in Tokyo.
"Abe did touch on the yen this week, but fundamental demerits of a weaker currency are yet to stand out. For example prices of gasoline, crucial to regional economies, have not risen despite a depreciating yen, and he may have spoken merely to counter his critics," he said.
The dollar rose 0.2 percent to 108.985 yen after slipping to as low as 108.47, off this week's six-year highs above 109 yen.