Yen Heads for Longest Losing Streak Since May on Divergence Bet

(Bloomberg) -- The yen fell, extending a third weekly decline against the dollar, as mounting speculation the Federal Reserve will raise interest rates this year rekindled policy divergence with Japan.

The Japanese currency dropped after better-than-forecast data on Chinese consumer and producer prices sapped demand for safety. The chance of the Fed raising interest rates by year-end have increased this month, pushing up Treasury yields and boosting demand for the dollar. Traders will look for clues on how policy makers view the U.S. economy later today when Fed Chair Janet Yellen speaks in Boston, while they’re also awaiting a report which economists expect will show a recovery in retail sales.

“It’s mostly a U.S. story, with a firmer dollar through the week,” said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “Changing risk sentiment” is also playing a role, he said, “with the yen stronger yesterday when we got the disappointing import-export data in China, and the opposite this morning, with good numbers out of China, positive equity markets and a weaker yen.”

The yen fell 0.5 percent to 104.25 per dollar as of 7:30 a.m. in New York, leaving it down 1.2 percent since last Friday and 3 percent lower over the past three weeks -- its longest losing streak since May.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, rose 0.1 percent, extending its weekly gain to 0.7 percent. The euro dropped 0.4 percent to $1.1016, extending its slide to 1.7 percent in a week when the single currency slipped below $1.10 for the first time since July.

No Taper

The yen’s losses deepened after Bank of Japan Governor Haruhiko Kuroda said Oct. 8 that the central bank has no intention of reducing the bond purchases that are expanding the money supply and should act as a brake on the currency.

There’s a 66 percent chance the Fed will raise its benchmark rate by its December meeting, up from 59 percent at the end of September, according to fed fund futures data compiled by Bloomberg. The calculations assume the central bank’s benchmark will average 0.625 percent after the next increase.

Yet Steven Englander of Citigroup Inc. sees that probability as too high.

“Right now, investors worry mainly about whether a December hike means a faster pace in 2017,” Englander, the bank’s New York-based global head of Group-of-10 foreign-exchange strategy, said in a note. “To my mind, 65 to 70 percent hiking probability is too high, and we have vulnerability to any softening in data. A severe deterioration in Chinese economic and financial conditions would be a major risk-negative.”

--With assistance from Charlotte Ryan and Lilian Karunungan To contact the reporters on this story: Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net, Marianna Aragao in London at mduartedeara@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Paul Armstrong, Keith Jenkins