Yen Holds Three-Week Decline as Hedge Funds Reduce Bullish Bets

(Bloomberg) -- The yen held a three-week decline against the dollar as hedge funds trimmed bullish bets on the Japanese currency by the most since May and speculation increased that the Federal Reserve will raise interest rates this year.

Japan’s currency was little changed after declining 3 percent in the past three weeks as Bank of Japan Governor Haruhiko Kuroda said this month the central bank had no intention of reducing bond purchases and an economic adviser to Prime Minister Shinzo Abe called for a third supplementary budget and closer coordination between monetary and fiscal policy.

A Bloomberg gauge of the dollar was within one-half percent of its highest level since March as the market-implied probability the Fed will tighten this year held at 66 percent, compared with 59 percent at the end of September.

“We have turned bullish dollar-yen,” said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia in Sydney. “Japanese government fiscal easing and a bottoming out of commodity prices will narrow Japan’s current-account surplus and weaken the yen.”

The yen was at 104.13 per dollar at 7:20 a.m. in New York, after weakening 0.5 percent on Friday. The Bloomberg Dollar Spot Index was little changed, after reaching the highest level in almost seven months on Oct. 13. The euro climbed 0.2 percent to $1.0992, having tumbled 2 percent last week, its biggest drop versus the greenback since November.

Oil Negative

As an oil importer, Japan sees the rise in crude prices as negative for its currency. Money managers are the most bullish on the U.S. benchmark crude contract in two years, reducing bets on lower prices as OPEC agreed to its first deal to cut output in eight years. Brent crude-oil futures rose 0.5 percent to $52.19 a barrel on Monday.

“Higher oil prices would weaken Japan’s terms of trade,” said Lee Hardman, a London-based foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “Higher prices also help to lift global yields, particularly outside of Japan, as inflation expectations rise. Generally when yields outside of Japan rise, that helps to weaken the yen against other currencies.”

Hedge Funds

Bullish bets on the yen by hedge funds and other large speculators exceeded those benefiting from losses by 45,909 in the week ended Oct. 11, down by 22,786 contracts from the previous period, Commodity Futures Trading Commission data show. That’s the biggest drop since the week ended May 24.

Speculation the BOJ will consider more easing will intensify before its next meeting on Nov. 1, while the European Central Bank is set to announce in December an extension of its asset purchases, according to Royal Bank of Scotland Group Plc.

To contact the reporters on this story: Netty Ismail in Singapore at nismail3@bloomberg.net, Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net, Charlotte Ryan in London at cryan147@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Todd White, Keith Jenkins