Yen to Top Euro, Dollar by Year-End, Leading Forecaster Says

(Bloomberg) -- The yen will win the battle of the three major currencies in coming months as the dollar continues to correct and further monetary stimulus weighs on the euro, according to leading forecaster Mizuho Bank Ltd.

Europe’s shared currency will drop 4% to 117 yen by the end of the year, while the dollar will fall a little more to 103 yen, predicted chief market economist Daisuke Karakama. The Japanese bank had the most accurate estimate for the euro-yen in Bloomberg rankings for the second quarter.

“As both currencies appreciate against the dollar, the yen will prevail over the euro because of the relative absence of political noise in Japan,” Karakama said in an interview in Tokyo. “Also, the power of central bank policy driving down the currency is stronger for Europe, making the euro more prone to weakness.”

Karakama, 39, served as a visiting economist at the European Commission during the global financial crisis.

The Japanese currency has risen almost 2% against the dollar so far this year, as traders bet the Federal Reserve could begin cutting interest rates as soon as this month, to stave off an economic downturn. It has risen over 3% against the euro, which has been under pressure thanks to anemic growth in the region and expectations of further stimulus from the European Central Bank.

Dollar Weakness

Karakama believes that the dollar will continue to weaken against most currencies after five years of strength as U.S. yields decline. The Fed has more scope for rate cuts than the ECB, which in turn has greater potential to ease than the Bank of Japan. This will keep pressure on the dollar and euro, and help the yen outperform its two largest rivals, he said.

There are also far more political issues that will weigh on Europe’s single currency than can pressure its Japanese peer, he said.

”The dollar’s broad weakening and falling U.S. yields have helped mask the euro’s weakness,” he said. “The degree of monetary easing is deeper than it appears to be in Europe, which will undermine Japanese investor appetite for the euro.”

Futures traders are pricing in a quarter-point cut by the Fed by July as a certainty and around a percentage point of easing for the coming year. Market pricing points to an ECB rate cut by September.

U.S. Rates

The magnitude of the euro’s decline against the yen will be contingent on what happens to the dollar crosses, according to Karakama. If investors start to price in more than three Fed rate cuts this year and the 10-year Treasury yield falls toward the 1.5% level, the dollar-yen would likely approach 100 and the euro-yen could reach 115, he said.

The euro traded at 121.64 yen Thursday while the greenback was at 107.79 yen. The benchmark U.S. government bond yield closed Wednesday at 1.95%.

To contact the reporter on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Cormac Mullen, Shikhar Balwani

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