BANGALORE: The yen will weaken against the dollar over the year as a US recovery gathers pace and Treasury yields rise, but turmoil in the Middle East might briefly prop up the Japanese currency, a Reuters poll showed.
The survey of 65 strategists, taken this week, saw the dollar at 83.0 yen in a month's time, 85.0 in three and 86.0 in six months.
The dollar is expected to rise to 90 yen in a year's time, a level not seen since last June when the Greek debt crisis threatened to spread across the euro area and caused investors to flee to safety.
"I believe that eventually the yen will succumb to a relatively lower yield, compared to the US in particular," said Mitul Kotecha, head of global FX strategy at CA-CIB, who was the most accurate forecaster on the yen last month.
"I think increasingly yield will become important as drivers of many currencies, in particular the dollar-yen where our forecasts show quite a sharp move in terms of relative yields between the US and Japan."
In a separate poll taken last month, analysts saw the 10-year US Treasury yield rise 50 basis points to 3.90 percent by the end of this year from the present 3.40 percent.
On the other hand 10-year JGBs are seen yielding 1.40 percent, a mere 12 basis point increase from the current 1.28 percent, further widening the US-JP 10-year yield spreads.
Favourable yield differentials, coupled with brightening prospects for the US economy, would help to strengthen the greenback.
Data released on Tuesday showed US manufacturing grew at its fastest pace in nearly seven years, boosting expectations of greatly improved employment figures on Friday.
"Certainly the US growth momentum is decent right now, I guess offset by what we are hearing from the Federal Reserve, and obviously we had a speech from (Fed Chairman Ben) Bernanke yesterday, in general terms he seems to remain fairly relaxed," said Tom Levinson at ING Financial Markets, who is at present leading the Reuters accuracy league.
In comments to the US Senate Banking Committee on Tuesday, Bernanke, seemed unperturbed by the spike in crude oil and inflation saying it is unlikely to hurt the US economy unless it is sustained.
BOJ ON HOLD
Poll results however suggest the Federal Reserve will increase interest rates by the fourth quarter of this year while the BoJ will likely maintain overnight call rates in a range of zero to 0.1 percent, at least until October 2012 making the dollar more lucrative to investors.
In the near term, however, analysts see the yen range bound between 83-86 against the dollar over the next six months as strategists gauge developments in the Middle East and its effect on the traditionally safe-haven currency.
However, risk -- historically the main driver of yen movement -- no longer plays the vital role it did a few years ago, Kotecha said.
"Higher risk aversion has pushed the yen higher whereas improving risk appetite has not done anything for the yen in the last year.
"On the margin it (the Middle East turmoil) is obviously yen-supportive. That is one of the reasons the dollar-yen has moved lower in the last few weeks."
Wednesday saw oil rise to a 2-1/2 year high and stocks tumble as tensions escalated in the Middle East, causing investors to scurry to safer assets.
The poll also showed the euro trading at 112.8 yen in a month's time, 115.3 in six and 119.0 in 12 months compared with 111.8, 112.5 and 117.6 respectively in the February poll.
Volatility in the yen against the dollar, was seen rising to 8.9 percent according to the poll, higher than the 7.5 percent seen last month.
The swiss franc was seen depreciating against the euro from 1.29 in one month to 1.31 in six and 1.35 in 12 months respectively, largely unchanged from last month.
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