WEST PALM BEACH, FL (HEDGECO.NET) – Many Japanese currency investors are selling the dollar, and buying the yen, as currency market analysts think the dollar would continue to fall in the comingmonths. JP Morgan is predicting that the dollar could fall to Y95 by the end of 2004 – which would be the yen’s strongest level since 1995.
According to published reports, the yen options volatility has seen a sudden increase following the end of the G7 economic meeting. The yen options volatility is an indication of trading activity in the underlying currency. When yen option volatility soars, currency analysts explain that there is an increasing action in the yen foreign exchange trade.
Many funds and currency investors are placing bets that the yen would continue to rise against the dollar, and are hedging against the rise of the yen. The dollar has fallen from Y114 to Y103, according to analysts that represent the dollars� lowest level in 3 years. IDEA global�s currency strategist Sean Callow predicts that continuing portfolio inflows into Japan and the G7 meeting would only increase volatility. Callow said, “By extension this will mean increased hedging activity in the derivatives market.” Gary Noone, currency analyst at Informa explained that �trading has been one-way; people are thinking the G7 won’t come out with a strong line against dollar weakness and that it will be seen as a green light to sell dollars.” The yen continues to rise against the dollar despite measures introduced by the Bank of Japan to curb such rise. Ordinarily when a country�s currency rises, its products become more expensive in the international markets, and such tendency, has the inclination to decrease foreign exports. But in the case of the rising yen, Japanese foreign exports to China have actually seen a big increase.
Currency analysts explain that such increases in Japanese exports to China is the result of Chinese currency RMB being artificially pegged to the dollar, so a drop in the dollar also weakens the Chinese currency as well. The Chairman of the Federal Reserve Alan Greenspan in his February testimony to the US Congress told law makers that the US economy is improving, Greenspan however was worried about the growing US deficit, meanwhile interest rates remain unchanged, and in a presidential election year, the Federal Reserve is unlikely to change US interest rates soon, nor introduce fiscal measures to shore up the falling dollar. If things remain as it is currently, predictions that the dollar would continue to fall may indeed be justified.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
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