The Japanese yen's current strength will dissipate only a little over the next year as evidence grows that the US economy is picking up speed, pushing the dollar higher but without seriously denting the yen, a Reuters poll showed. Economic growth in the United States has recently gathered pace, which coupled with a pickup in employment is likely to push the dollar a little higher.
The US dollar is expected to trade around 77 yen in a month's time, roughly similar to Thursday's levels, 78 yen in six months and 80 yen in December 2012, according to the median consensus of over 60 strategists polled this week. That is the strongest year-end yen forecast by strategists in more than a dozen years of Reuters polls, and underscores the difficulty Japan faces in returning the yen to weaker levels to help stoke its export-reliant economy.
Indeed, data from the US Commodity Futures Trading Commission showed net long positions in the Japanese yen as of December 27, meaning the currency is likely to stay strong at current levels over the next few months. "The market each year has been rolling the yen in terms of consensus. There is a bit of a capitulation taking place now and that explains why we're seeing low dollar/yen forecast because each year the consensus does get it wrong," said Mitul Kotecha, chief foreign exchange strategist at Credit Agricole CIB.
The yen had a rollercoaster ride through much of last year as swelling demand for the currency and intervention in foreign exchange markets by Japanese authorities tossed it around. It weakened to around 85 to the dollar in the first few months of last year, then strengthened to around 75 yen in the aftermath of the earthquake, tsunami and ensuing nuclear crisis that hit the island nation in March 2011.
The yen ultimately gained more than 5 percent against the dollar in 2011 because of a huge repatriation of funds following the disaster, breaking step with the declining euro and sterling. The rapid appreciation prompted Japanese authorities to intervene several times in foreign exchange markets, spending a total 14.3 trillion yen to protect the economy, with limited success.
Although strategists do not expect any shift in the trend of a gradually weakening yen in 2012, the currency may face external challenges such as a deterioration in economic activity, particularly in the euro zone and the United States. While the euro zone may be tested again this year, the US Federal Reserve is widely expected to conduct another round of quantitative easing to jump-start its housing market, considered critical to any meaningful economic recovery.
Both could lend support to the yen, due to its safe haven status and dollar weakness resulting from the Fed's printing of more money. "The risk of it is quite high," added Kotecha, referring to further stimulus by the Fed. Volatility in trading the yen is expected to rise in January, clocking an annualised rate of 6.7 percent compared to actual volatility of 4.8 percent in December. The poll also showed the Swiss franc was expected to trade at 1.22 in one month, 1.25 in six months before closing the year at 1.26.