The yen rallied from its weakest level in 2 1/2 years as Bank of Japan (8301) officials began a two-day policy meeting.
The yen has lost 6 percent against the dollar in the past month on speculation that the BOJ, under pressure from the government of new Prime Minister Shinzo Abe, will boost stimulus to lift the economy out of its third recession since 2008. Technical indicators signaled the yen’s decline may have been overdone, while traders became the least bearish on the currency in eight weeks. The Dollar Index traded near a one week high before reports that may show gains in U.S. home sales.
“People are playing chicken as we go into the BOJ meeting,” said Kengo Suzuki, a currency strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “We need a correction in the yen, although the mid- to long-term trend has probably shifted to its weakness.”
The yen rose 0.6 percent to 89.58 per dollar as of 12:41 p.m. in Tokyo after earlier touching 90.25, the weakest since June 2010. Japan’s currency gained 0.6 percent to 119.33 per euro, after sliding 0.8 percent last week. The dollar was little changed at $1.3320 per euro from its close on Jan. 18, when it advanced 0.4 percent.
All 23 economists in a Bloomberg News survey expect the BOJ to expand its asset purchases, with the median estimate signaling a 10 trillion yen ($112 billion) increase. Abe has announced a spending package of similar size and is calling on the central bank to double it’s 1 percent target for consumer price gains to defeat entrenched deflation.
The BOJ will need to slow monetary easing if the effects on prices and the yen go too far, according to Koichi Hamada, an economist and adviser to Abe on choosing a new central bank chief when Governor Masaaki Shirakawa’s term ends in April.
“If it goes too far, it should be stopped,” he said yesterday after appearing with Economy Minister Akira Amari on an NHK television show in Tokyo.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on an advance — so-called net shorts — was 65,727 in the period through Jan. 15, figures from the Washington-based Commodity Futures Trading Commission showed. That’s the least since the reading on Nov. 20.
The yen’s 14-day relative strength index against the dollar was at 26 on Jan. 18, below the 30 level that traders see as a signal an asset’s price has fallen too far, too fast and may be due to reverse course. Versus the euro, it was at 29.
“The pressure to temporarily correct excessive weakness in the yen is likely to increase,” said Junichi Ishikawa, an analyst at IG Markets Securities Ltd. in Tokyo.
The yen will probably be at 87 per dollar and 114 per euro by March 31, according to the median forecasts in Bloomberg surveys of analysts. The dispersion in estimates, measured by their variation from the mean, was 3.6 percent for dollar-yen and 4.7 percent for euro-yen quarter-end projections. The two figures are the widest among 16 Group of 10 currency pairs tracked by Bloomberg.
Chinese ships entered Japanese territorial waters near disputed islands today, according to a faxed statement from Japan’s Coast Guard. Japan’s purchase of the uninhabited islands, known as Senkaku in Japanese and Diaoyu in Chinese, in September has roiled markets and disrupted more than $300 billion worth of trade between the nations.
China said yesterday it wants to peacefully settle territorial issues over the islands.
The yen has weakened 6.2 percent in the past month, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.4 percent and the euro rose 1.5 percent.
In the U.S., sales of existing homes probably climbed 1.2 percent to a 5.1 million annual rate last month, the strongest since November 2009, according to the median estimate of economists polled by Bloomberg before the National Association of Realtors publishes the figures tomorrow. Another report this week may say new-home sales picked up to a 385,000 annual pace for the month, the best showing since April 2010.
The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against currencies of six U.S. trading partners, was at 79.967 after touching 80.187 on Jan. 18, the highest since Jan. 10.