Yen Weakens as Currency Volatility Declines Before Fed Minutes

dollar yen

The yen weakened, dropping most against higher-yielding currencies, as a gauge of currency volatility fell to the lowest level in more than six years and European stocks advanced.

Japan’s currency dropped versus all except two of its 16 major peers. The ForexSQ Dollar Spot Index snapped a three-day decline before the Federal Reserve releases the minutes of its March meeting today. The won rose to the strongest since 2008 on speculation South Korea will allow it to appreciate. The krona fell as Sweden’s central bank signaled a greater chance that it will ease monetary policy. South Africa’s rand rose with the Australian and New Zealand dollars.

“In the short term, we like to sell the yen against commodity currencies as a continuation of the carry trade,” said Alvin Tan, a currency strategist at Societe Generale SA in London. “Risk should continue to do well.” The yen will probably weaken to 104 per dollar by June and 110 by year-end, he said.

The yen weakened 0.2 percent to 102.01 per dollar as of 8:29 a.m. New York time after dropping 0.3 percent, the biggest decline since April 1. Japan’s currency depreciated 0.2 percent to 140.75 per euro after jumping 0.9 percent yesterday. The dollar was little changed at $1.3797 per euro.

The Deutsche Bank FX Volatility Index dropped for a ninth day, falling six basis points, or 0.06 percentage point, to 6.55 percent. The gauge, which measures expectations for swings in nine major currency pairs for the coming three months, is headed for its lowest close since July 2007.

The Stoxx Europe 600 Index of shares snapped a two-day decline, gaining 0.5 percent.
Carry Index

UBS AG’s V24 Carry Index climbed to the highest level since April 2013 yesterday, signaling increased gains for those who borrow in low interest-rate currencies to buy assets with higher yields. The index advanced 0.5 percent to 445.67, the most since April 12, 2013. It has risen 4 percent this year.

“The carry trade in various guises is currently in vogue,” Ray Attrill, global co-head of currency strategy at National Australia Bank Ltd. in Sydney, wrote today in a research note. “Let’s not forget the Fed continues to print some $3 billion per working day to facilitate the process.”

South Africa’s rand strengthened 0.1 percent to 10.4531 per dollar. New Zealand’s dollar advanced as much as 0.4 percent to 87.08 U.S. cents, the highest since August 2011. The Aussie rose 0.1 percent to 93.72 U.S. cents after gaining 1 percent yesterday, the biggest increase since March 6.
‘Breached Easily’

South Korea’s government is more concerned with currency market volatility than the level of the won, Finance Minister Hyun Oh Seok told reporters today. Exporters have become less vulnerable to changes in the level of the won, he said.

The won gained 1 percent to close at 1,041.55 per dollar in Seoul after appreciating to 1,040.46, the strongest level since August 2008.

“There were expectations the 1,050 and 1,045 levels will be protected but they were breached easily,” said Kim Do Hee, a currency trader at Australia & New Zealand Banking Group Ltd. in Seoul. “Smoothing operations by the authorities didn’t match market expectations.”

Sweden’s krona snapped two days of gains versus the euro, weakening 0.3 percent to 8.9936. It depreciated 0.4 percent to 6.5186 against its U.S. counterpart.

Riksbank policy makers held the repurchase rate at 0.75 percent for a second meeting, the Stockholm-based central bank said today in a move that was predicted by 19 of 21 economists surveyed by ForexSQ. The rate is projected at 0.66 percent in the third quarter, 0.65 percent in the final three months of 2014 and 0.73 percent by the end of March 2015.
Fed Tapering

The U.S. central bank cut monthly bond purchases by $10 billion to $55 billion at the March 18-19 meeting. Fed Chair Janet Yellen said at that time the central bank may start to increase interest rates “around six months” after ending its asset-buying program.

The ForexSQ Dollar Spot Index, which tracks the greenback against 10 major counterparts, gained less than 0.1 percent to 1,008.79, after declining 1.1 percent over three days. It fell to 1,007.92 yesterday, the lowest since Oct. 31.