Dollar rises to five-year high against yen

The dollar strengthened to a five-year high against the yen (FOREX:JPYUSD) on optimism U.S. economic growth will outperform Japan’s next year.

The Bloomberg Dollar Spot Index advanced for a fourth day after the Federal Reserve said this week it would cut monthly bond purchases by $10 billion as economic growth improves. The yen headed for an eighth weekly decline against the U.S. currency after the Bank of Japan retained its plan to add 60 trillion yen ($574 billion) to 70 trillion yen a year to the monetary base. Turkey’s lira fell to a record as the government purged police leadership to fight against a corruption probe.

“The broad majority in the market is looking for positive signs coming out of the tapering decision,” said Carl Hammer, a currency strategist at SEB AB in Stockholm. “The dollar will strengthen against the yen and commodities currencies in 2014. We expect the BOJ to be more aggressive on the easing front.”

The dollar rose 0.2% to 104.50 yen at 9:01 a.m. New York time after appreciating to 104.64, the strongest level since October 2008. The U.S. currency gained 0.1% to $1.3645 per euro after appreciating to $1.3625, the most since Dec. 6. The yen fell 0.2% to 142.69 per euro.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose 0.2% to 1,025.21 after reaching the highest level since Sept. 13.

Euro Negative

The euro fell for a third day against the greenback after Standard & Poor’s cut the European Union’s long-term rating to AA+ with a stable outlook. The region’s financial profile has deteriorated and “cohesion” among the member states has lessened, the rating company said.

“It seems to have been a short-term negative for the euro,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. “That said, the times when ratings downgrades had a lasting impact on foreign-exchange rates seem to be a thing of the past.”

European Central Bank President Mario Draghi said Dec. 16 that there are risks from long periods of low inflation and policy makers have tools to address this, including “several other instruments on the liquidity front.”

“Euro-dollar will gradually grind lower” to less than $1.30 in a year, said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Next year, the risk is that the ECB may move to boost liquidity” while the Fed keeps reducing stimulus, he said.

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