Euro Rises on Brightening Outlook; Yen Falls Again

Euro Rises on Brightening Outlook; Yen Falls Again

A lower swap premium suggests smaller demand for the greenback and diminished funding stress in the euro zone.

Two-year German bond yields jumped to their highest since March 2012 and rose above their U.S. counterparts for the first time in two years, suggesting interest-rate differential is moving in favor of the euro, analysts said.

In the options market, traders reported demand for euro calls, which are bets on more gains, although one-month risk reversals on Friday still showed a minor bias for puts or more euro weakness. However, this was the smallest euro put level since November 2009.

The dollar rose as high as 91.19 yen, the strongest since June, 2010, rising past reported options barrier at 90.75 and 91 yen. It was last up 0.6 percent at 90.88 yen.

On the week, the dollar rose about 1 percent versus the yen, and has gained every week versus the yen since the week ended Nov. 11.

Expectations that Japan’s new prime minister, Shinzo Abe, will force the central bank to aggressively ease monetary policy has caused the yen to lose more than 10 percent of its value against the dollar since mid-November, and many expect more declines.

Japan’s core consumer prices slipped for a second straight month in the year to December, signaling the economy was still in deflation and piling more pressure on the central bank to adopt more stimulus steps to achieve its new inflation target.

The yen’s steep drop has raised eyebrows abroad, with German Chancellor Angela Merkel singling out Japan on Thursday as a source of worry. But Japanese Finance Minister Taro Aso said Friday that monetary easing was aimed at pulling the country out of deflation, not manipulating currencies.

(Read More: Germany’s Central Bank Head Slams Japan’s Yen Policy)

BNP Paribas in a note said the yen’s downside momentum remained strong, but the back-and-forth statements about the currency’s weakness between foreign politicians and Japanese officials should exacerbate volatility.

The euro rose 1.3 percent to 122.40 yen putting it on track for a weekly rise of 2 percent, the seventh straight week of gains. It had earlier touched 122.77, its highest level since mid-April 2011.

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