The yen fell broadly today, hitting 10-month lows against the euro and touching its lowest level in nearly three weeks versus the dollar as interest rate differentials widened in favour of US and European currencies.
Hawkish comments by Federal Reserve and European Central Bank officials contrasted with the stance taken by the Bank of Japan, which is set to leave interest rates near zero for some time to support the world's third-largest economy as it recovers from the effects of the March 11th earthquake.
Speculation that Japanese investors may reduce dollar hedging positions related to their overseas investment and the absence of huge repatriation flows following the quake are shifting the focus back to economic fundamentals, which are reinforcing the yen's status as a funding currency.
"We've had comments from the Fed and a shift in sentiment towards the US policy from a rate perspective that has really pushed US-Japan yield differentials, driving the dollar higher," said Mitul Kotecha, head of global FX strategy at Credit Agricole in Hong Kong.
"The fiscal year-end isn't a story any more. The market is coming round to the view we're not going to see the scale of repatriation once expected."
The dollar rose 0.6 per cent on the day to a three-week peak of 83.02, having breached its 50-day moving average of 82.10. The next resistance level is seen at 83.30, the March 11th high.
The move gathered pace when Dallas Fed president Richard Fisher told Fox Business he would vote against any further monetary easing after the current $600 billion bond buying programme ends in June.
The greenback is now above an 82.00 yen high marked on March 18th, when Japanese authorities and other G7 central banks worked in concert to stop runaway yen gains. This level will now act as support.
A Japanese brokerage trader said there is a possibility Japanese investors could reduce their hedges if they turn negative on the yen's medium-term outlook, a factor that could push the dollar towards 90-100 yen.
Some analysts also said there is a risk that Japan's trade deficit could shrink, reducing natural upward pressure on the yen, as exports are likely to fall in the aftermath of the quake and energy and resource-related imports could rise.
The dollar is up nearly 9 per cent against the yen since hitting a record low of 76.25 yen on March 17th.
Today's move came as the two-year US Treasury yield climbed to near six-week highs around 0.83 per cent after St Louis Fed chief James Bullard urged the US central bank to begin reversing its campaign of monetary easing.
Mr Bullard, who does not have a vote on Fed policy this year, said the Fed could trim its $600 billion bond-buying programme by $100 billion.
"Non-voting, regional Fed presidents might rarely have been so important ... so long as they say what the market wants to hear," David Watt, a strategist at RBC, wrote in a client note.
The euro rose to 116.95 yen after breaking through major resistance around 115.50/60, a level that has capped the pair since May 2010. The single currency has been driven by expectations that the ECB, worried about inflation, may raise rates in April.
That view was supported by ECB Governing Council member Jozef Makuch, who said yesterday the ECB was "highly" likely to raise its main interest rate from the current record low level of 1.0 per cent next month.
ECB executive Board member Juergen Stark was also quoted as saying the ECB should not delay raising interest rates.
The euro was down a quarter per cent at $1.4078 while the dollar index rose 0.1 per cent against a basket of major currencies, although it stayed well off last week's 15-month lows of 75.340.
Elsewhere, the Australian dollar rose to a fresh 29-year peak of $1.0334. It hit highs not seen since early 1982, when it was a managed currency.
Traders cited a confluence of supportive factors including persistent talk of M&A flows, solid demand for higher-yielding currencies and lofty commodity prices. Against the yen, it popped above 85 for the first time since May 2010.
Reuters