The yen is expected to weaken against the dollar by year-end, driven by improving US news but also held back by Japanese policymakers who are determined to prevent the yen from rising sharply. For now, investors seem to be taking a wait-and-see stance on the Japanese currency following the first downgrade of Japan's sovereign credit rating since 2002, which took financial markets by surprise last week.
-- Yen to stay range bound over the next 12 months
-- Swiss franc to reach parity against the dollar in a year
At the same time, the outlook for the US economy has improved dramatically in recent weeks even though interest rate rises from the US Federal Reserve are still nowhere on the near-term horizon. In the monthly Reuters currency survey of more than 60 analysts, taken between January 31 and February 2, the dollar was seen trading at 83 yen in a month and 86 in six months compared with 81.51 on Wednesday. Those consensus forecasts are largely unchanged from the early January poll.
The yen is seen trading at 90 in a year, although the 12-month consensus forecast for dollar/yen has been notoriously inaccurate over past years, with analysts consistently too negative on the yen's prospects. "The yen was obviously shell-shocked by S&P's country downgrade, but was not derailed," said Roberto Mialich, senior currency strategist at Milan's UniCredit.
The yen has long been perceived as a safe haven but some say S&P's decision to downgrade Japan's long-term debt rating took off some of that shine. The dollar rose about 1 percent against the yen in the immediate aftermath. Mialich said dollar/yen would trade in an 81-83 "no man's land" range over the next several months.
Japanese authorities have geared up to ensure there's enough capacity to stem appreciation and to avoid a repeat of 2010, when the yen surged 13 percent against the dollar. "The BoJ has already introduced a new asset purchase scheme, which can be expanded flexibly," said Meng Jiao, G10 FX strategist at BofAML.
To aid intervention, the Ministry of Finance (MoF) is set to hike the borrowing cap at the Foreign Exchange Fund Special Account by 5 trillion yen ($60 billion) to 150 trillion yen ($1.81 trillion) under the fiscal 2011 budget, added Jiao. In an extra question, asked to predict the 2011 year-end dollar index level, the poll suggested a median of 80.5 from more than 50 respondents.
Japan, whose fiscal discipline is under increased scrutiny, faces the twin challenge of managing its debt pile and ensuring growth in an economy faced with persistent deflation. In a G7 macro economic poll conducted by Reuters last month, the country was expected to return to moderate growth in 2011 even as deflation was likely to persist until at least the second quarter of 2012.
Cross rates calculated by Reuters show the euro trading at 112 yen in a month, 112.5 in six months and 118 in a year - slightly higher than the 109, 111 and 115 yen seen in last month's survey. The poll also indicated the Swiss franc would depreciate a tad but largely stay in a tight zone between 0.95 in a month's time, 0.99 in six months and parity to the dollar in a year.
"Swings between risk aversion and risk appetite should continue to lock USD-CHF in the 0.95/1.00 band in a quite directionless trading for a prolonged arch of time," said Roberto Mialich. Euro-Swiss franc cross rates were calculated at around 1.30 on the one-, six- and 12-month horizon, unchanged from last month's survey.