Yen, Dollar Fall After U.S. Congress Passes Bill to Avert Cliff

by on January 2, 2013 6:43 am GMT

The yen and dollar weakened against most of their major counterparts as U.S. lawmakers passed legislation to avert the so-called fiscal cliff of automatic spending cuts and tax increases.

The Dollar Index (DXY) dropped as the House of Representatives approved a bill that prevents higher income tax for most U.S. workers. The yen fell past 87 per dollar for the first time in 2 1/2 years after Japan’s Prime Minister Shinzo Abe reiterated his intention to weaken the nation’s currency.

“This is a typical risk-on market, where the yen and dollar are sold,” said Satoshi Okagawa, a senior global markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest financial group by market value. “The cliff is behind us for now.”

The yen dropped to as low as 87.30 per dollar, a level unseen since July 29, 2010, and was at 87.21 as of 1:18 p.m. in Singapore, down 0.5 percent from its close on Dec. 31. The yen slid 1.1 percent to 115.72 per euro after earlier touching 115.99, the weakest since July 8, 2011. The dollar lost 0.6 percent to $1.3269 against the euro.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, slid 0.4 percent to 79.451.

There was no trade in major markets yesterday, and Japan is closed until Jan. 4 for national holidays.

Budget Bill

President Barack Obama said he will sign the bill passed by Congress. The bipartisan vote in the U.S. House broke a yearlong impasse over how to head off $600 billion in tax increases and spending cuts set to begin taking effect at the start of this year.

Regardless of whatever resolution there is on the cliff, “fiscal policy is likely to hit U.S. growth,” Sean Callow, a senior currency strategist at Westpac Banking Corp. (WBC) in Sydney, said in a Bloomberg Television interview. “It is a weak dollar story, fairly broadly, in the first few months of the year.”

Japan’s Abe said in a New Year statement yesterday that the most urgent issue for his country is to break out of currency appreciation and deflation. “Bold” monetary policy is one of the three prongs of his economic measures, he said.

“For the moment, the yen is probably going to remain weak,” said Andrew Salter, a currency strategist in Sydney at Australia & New Zealand Banking Group Ltd. (ANZ) “If you look out a month or two, it really depends upon what the government is able to achieve as far as the central bank is concerned.”

‘Neutral Territory’

While the Japanese currency dropped 11 percent last year versus the dollar, the biggest annual slide since 2005, it is still about 16 percent stronger than the 10-year average of 101 per greenback.

“Neutral territory” for the yen is about 100 against the dollar, according to Carlos Ghosn, president of Nissan Motor Co., Japan’s second-largest automaker. “Please bring it back to the neutral territory so that we can do our job without a handicap,” he said at a year-end briefing.

Looking at “the big picture,” the yen will weaken toward 93.99 per dollar, according an e-mailed note from Callum Henderson, global head of currency research in Singapore at Standard Chartered Plc. The level, unseen since May 2010, is the 38.2 percent retracement on the pair’s Fibonacci chart of the move from 124.14 in June 2007 to 75.35 in October 2011.