The yen touched the weakest level in almost three years against the dollar after the Bank of Japan governor said he will step down early, accelerating a transition that may aid the prime minister’s plan for aggressive easing.
The euro fluctuated against the dollar as French President Francois Hollande called for leaders to steer the currency’s exchange rate, and the European Central Bank’s balance sheet shrank to the smallest in almost a year after euro-area banks started to repay emergency loans. Australia’s dollar weakened after the central bank said the inflation outlook allowed scope for further interest-rate cuts. BOJ Governor Masaaki Shirakawa will exit on March 19, almost three weeks before his term was due.
“The yen is a big mover today and that has to do with this announcement from Shirakawa that he’s resigning earlier,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said in a telephone interview. “The rise in euro yen is more of a Japanese yen move.”
The yen slid 0.8% to 93.13 per dollar at 9:42 a.m. New York time after touching 93.52, weakest since May 13, 2010. The euro rose 0.8% to 125.81 yen after reaching 126.97 on Feb. 1. The shared currency was little changed at $1.3516 after rising and falling 0.4 percent.
The JPMorgan G7 Volatility Index, calculated based on premiums on currency options, climbed to 9.4%, the most since Aug. 2. It dropped to a more than five-year low of 7.06 on Dec. 18.
Balance Sheet
“We can’t let the euro fluctuate according to the mood of the market,” Hollande told reporters at the European Parliament in Strasbourg, France, becoming the most powerful European official to warn that the rising currency may deepen the recession.
The ECB balance sheet dropped 159.1 billion ($215.1 billion) to 2.77 trillion euros in the week ended Feb. 1, the Frankfurt-based central bank said in a statement. That’s the lowest level since Feb. 24 last year. ECB lending to banks declined 140.8 billion to 1.02 trillion.
The ECB’s balance sheet is shrinking just as the Federal Reserve and Bank of Japan expand theirs through further monetary stimulus. That’s pushing the euro higher, threatening to undermine European exports and a recovery from recession. The ECB meets Feb. 7.
Purchasing Managers
An index based on a survey of purchasing managers in the euro area’s services industry rose to 48.6 from 47.8 in December, London-based Markit Economics said in a report today. That’s above an initial estimate of 48.3 published on Jan. 24. A reading below 50 indicates contraction.
“The final PMI readings for Europe were obviously on the stronger side of expectations, so that has provided a bit more of a boost for the euro,” said Ian Stannard, the head of European foreign-exchange strategy at Morgan Stanley in London. “The underlying trend in the euro is still up but we need to be cautious going into the ECB meeting.”
The shared currency may slide to $1.3350 before the Feb. 7 ECB meeting, before rising to as much as $1.40 in the following weeks, Stannard said.
The ECB, which has held its main refinancing rate at 0.75 percent since July, will make no change at its next policy decision, according to all 58 economists surveyed by Bloomberg News.
Since ECB President Mario Draghi took over from Jean-Claude Trichet on Nov. 1, 2011, Deutsche Bank AG’s trade-weighted index for the euro against peers including the dollar, yen, Swiss franc, pound and Swedish krona has climbed 1.5 percent.
Leadership Transition
The yen slid after Shirakawa told reporters in Tokyo that he would leave at the same time as two deputy governors on March 19, accelerating a leadership transition that may aid Prime Minister Shinzo Abe’s campaign for aggressive easing. He is scheduled to step down on April 8.
The outgoing chief assured the stability of Japan’s financial system with liquidity injections during the global credit crisis, and again in the wake of the record March 2011 earthquake and tsunami. At the same time, his failure to end the nation’s trenchant deflation stoked criticism from lawmakers, and administration officials have pledged a replacement who shares Abe’s determination to end price declines.
“The next big thing on the horizon for the yen is going to be the next BOJ governor,” Stannard said. Shirakawa’s early departure “shouldn’t have any impact as far as meetings are concerned,” he said.
Yen Decline
The yen has dropped 8.1 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro has gained 2.8 percent and the dollar lost 0.2 percent.
Australia’s dollar slid after the Reserve Bank kept its benchmark interest rate unchanged at the half-century low of 3 percent. The so-called Aussie fell 0.5 percent to $1.0383.
Interest-rate swaps data compiled by Bloomberg show traders see a 53 percent chance the RBA will lower its benchmark rate at its next meeting on March 5.
