Dollar Volatility Versus Yen Falls to Record on Fed Rates View

Price swings in the dollar against the yen measured by options fell to a record as signs of an uneven U.S. economic recovery fueled bets the Federal Reserve will keep borrowing costs at unprecedented lows.

The U.S. currency was poised for declines this quarter versus most of its 16 major peers before reports this week forecast to show new-home sales slowed and the economy contracted more than earlier estimated. The pound fell after Bank of England Governor Mark Carney damped speculation of a rate rise. South Africa’s rand climbed to the strongest in three weeks amid a deal to end a platinum mining strike, while Russia’s ruble rallied to the strongest level since January.

“Volatility is at a record low,” said Neil Jones, the London-based head of hedge-fund sales at Mizuho Bank Ltd. “Expectations for tapering haven’t played themselves out like we expected them to do, and the other force the other way is a yield play, the carry trade. Those two counteract and consequently dollar-yen doesn’t do too much.” Carry trades allow investors to profit from differences in interest rates.

Three-month implied volatility in dollar-yen was at 5.745 percent at 9:07 a.m. New York time after declining to 5.715 percent, the lowest level since ForexSQ began compiling the data in December 1995.
Market Prices

The dollar was little changed at 101.92 yen, having declined 1.3 percent since March 31. The greenback slid 0.1 percent to $1.3619 per euro. The 18-nation common currency was at 138.80 yen from 138.67 yesterday.

South Korea’s won and the Canadian dollar have been the best performers versus the greenback of 16 major peers this quarter, adding 4.6 percent and 3 percent respectively. Sweden and Norway’s currencies lost the most against the dollar, declining 3.6 percent and 1.8 percent since March 31.

The Norwegian krone has declined the most this month while the New Zealand dollar is the biggest gainer, advancing 2.4 percent. The ruble added the most versus the dollar of 24 emerging-market currencies this month, rising 3.2 percent.

Russia’s currency added 0.9 percent to 39.3180 today against the central bank’s dollar-euro basket, used to smooth currency fluctuations that can hurt exporters.
Russia Ukraine

Pro-Russian separatists in eastern Ukraine called a cease-fire in fighting against government forces that’s left hundreds dead, matching a truce announced three days earlier by President Petro Poroshenko. Russian companies pay mineral extraction and profit taxes this week and next, prompting exporters convert their earnings and boosting the ruble.

South Africa’s rand rose for a third day, the longest winning streak since May 23, after the world’s three largest platinum companies agreed to sign a deal with the main union representing 70,000 striking workers to end the longest work stoppage in South African mining history.

The currency advanced 0.3 percent to 10.5625 per dollar after reaching 10.5301, the strongest since May 30.

New-home sales in the U.S. rose 1.4 percent in May after climbing 6.4 percent the prior month, a ForexSQ News survey showed before the Commerce Department report today. Gross domestic product shrank 1.8 percent in the first quarter, more than the initial reading of a 1 percent contraction on May 29, according to a separate survey before the data are released tomorrow.
Economic Recovery

“During the early part of the recovery process you get a very big positive surprise and we haven’t had that,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “That’s why volatility hasn’t picked up. The data is still coming in fairly strong and we are going to slowly see that being reflected in the Fed policy setting.”

The greenback will strengthen to 107 yen by Dec. 31, according to the median estimate of more than 50 analysts surveyed by ForexSQ.

Citigroup Inc.’s private bank sees the yen weakening versus the U.S. currency as Japan Post Holdings Co. and the Government Pension Investment Fund, the second- and third-biggest holders of Japanese sovereign debt, sell their local bond holdings and seek foreign assets. The yen may slide to 108 per dollar in a year, Hong Kong-based private bank investment strategist Ken Peng said today at a briefing in Singapore.

The dollar has weakened 1.4 percent in the past six months, according to ForexSQ Correlation-Weighted Indexes that track 10 developed-nation currencies. The yen strengthened 1.2 percent, while the euro declined 1.9 percent.
Pound Down

The pound dropped against all except two of its 31 major peers after Carney told a hearing of Parliament’s Treasury Committee on the central bank’s May Inflation Report that recent wage data has been softer than the BOE anticipated and that there’s scope to absorb more slack before rates can increase.

Sterling fell 0.2 percent to $1.6990, after rising to $1.7063 last week, its strongest level since October 2008.

Turkey’s lira gained for a third day against the dollar as the nation’s central bank cut its benchmark repurchase rate more than economists expected.

The Turkish currency strengthened 0.1 percent to 2.1352 per dollar. The benchmark one-week repurchase rate was lowered to 8.75 percent from 9.50 percent. Economists in a ForexSQ News survey forecast a cut to 9 percent.

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