The yen fell the most in two months against the dollar after Prime Minister Yoshihiko Noda said he will dissolve parliament, paving the way for elections that polls show his Democratic Party of Japan will lose.
The dollar dropped versus the euro after Federal Reserve Vice Chairman Janet Yellen said she supports tying the central bank’s low interest-rate outlook to economic goals before U.S. retail sales fell for the first time in four months. Japan’s currency weakened versus all of its major peers amid speculation the opposition will win power and pressure the central bank into a more aggressive easing policy, undermining demand for Japanese assets. The pound fell after the Bank of England lowered its growth forecasts.
“Speculation about early elections in Japan is negative for the yen,” said Antje Praefcke, a senior strategist at Commerzbank AG in Frankfurt. “The market thinks that the new government will press for expanding monetary policy even further.”
The yen tumbled 1.1 percent to 80.21 per dollar at 9:15 a.m. New York time after declining 1.2 percent, the biggest drop since Sept. 14. It fell 1.4 percent to 102.31 per euro after dropping 1.5 percent, the largest decline against the common currency since Sept. 14. The dollar slid 0.3 percent to $1.2748 versus the euro after reaching $1.2662 yesterday, the strongest level since Sept. 7.
Retail sales in the U.S. fell 0.3 percent in October, following a 1.3 percent increase in September that was larger than previously reported, Commerce Department figures showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a drop of 0.2 percent.
Dollar Index
The Dollar Index was little changed after strengthening past its 100-day moving average yesterday for the first time since Aug. 28 and touching 81.241, the most in more than two months.
Yellen joined three other Fed officials who have endorsed tying zero interest rates with progress on fighting unemployment as a way to provide more clarity on the central bank’s outlook for monetary policy. The policy-setting Federal Open Market Committee, which said last month it expects to keep its benchmark rate near zero through at least mid-2015, releases minutes from its October meeting today.
“Yellen sounded even more dovish than current Fed guidance,” Geoffrey Yu, a strategist at UBS AG in London, wrote in a note to investors. “The prospect of accommodative Fed policy for longer” has supported demand for higher-yielding assets, he wrote.
South Korea’s won rose against all its major counterparts and climbed to a 14-month high against the greenback. It gained 0.4 percent to 1,085.05 per dollar. Bank of Korea Governor Kim Choong Soo said at a forum in Seoul today domestic economic growth will “bounce back” next year as global conditions improve.
Mexico’s peso was 0.4 percent stronger at 13.1967 per dollar.
Implied volatility of three-month options for Group of Seven currencies slid to 7.2 percent today, matching the lowest since October 2007, according to the JPMorgan G7 Volatility Index. A decrease in price fluctuations makes investments in currencies with higher lending rates more attractive because the risk becomes smaller that market moves will erase profits.
Speaking in Japan’s parliament a day after the DPJ agreed with the two main opposition parties on legislation to fund the rest of this year’s budget, Noda said he would dissolve the lower house on Nov. 16 if a deal is reached to cut the number of lawmakers in the chamber. Shinzo Abe, head of the Liberal Democratic Party and a former prime minister, said he agreed.
Japan Deflation
The BOJ increased its asset-purchase program by 11 trillion yen to 66 trillion yen ($822 billion) on Oct. 30, saying the central bank and the government will make the “utmost” efforts to overcome deflation. Governor Masaaki Shirakawa and his board next meet on Nov. 19-20.
A stronger yen makes Japanese products costlier overseas, reducing the competitiveness of domestic exporters, while it cuts the value of income earned abroad when repatriated. The yen is 6 percent from its post-World War II record high of 75.35 against the dollar reached Oct. 31, 2011.
The U.K. currency slipped 0.3 percent to 80.28 pence per euro, after reaching 80.38 pence, the weakest level since Nov. 1 after the Bank of England said the U.K. economy may shrink in the current quarter.
“The weaker gross domestic product profile reflects the judgment that the broader causes and repercussions of the financial crisis may bear down more forcefully on demand and productivity than assumed” previously, the central bank said in its quarterly Inflation Report published in London today. “There seems a greater risk that the U.K. economy may be in a period of persistent low growth.”
