Dollar Gains vs. Yen in Thin Trading

The dollar gained on the yen and was supported by year end dollar buying by Japanese companies in thin holiday trading. The yen also fell against the Aussie and Kiwi dollars on Tuesday. Investors remain focused on the Fed and when it will raise rates and withdraw stimulus measures. Improved US economic data has prompted many investors and currency specialists to rethink forecasts when the Federal Reserve will raise rates. The dollar has recovered from a 14 year low against the yen. Currency markets will be watching Fed policy makers statements closely and will review other US economic data such as employment and labor market figures. Kazuyuki Takami of Bank of Tokyo-Mitsubishi UFJ stated, “The market is shifting its focus to the recently emerged theme of whether the Fed exit strategy will be sooner than expected. And it will closely scrutinize upcoming U.S. economic data.”

Positive US Employment Data Expected

After the number of US jobs lost shrunk to 11,000 in November many investors expect the December non-farm payrolls report due on January 8th to show more signs of US recovery. After a fall of about 19% in 2008 the dollar has gained 1.7% against the yen. The euro has gained 2.5% vs. the dollar in 2009. The Bank of Japan is expected to keep rates low which may put downward pressure on the currency in 2010.

Yen May Fund Carry Trades in 2010

Traders and investors say that once currency markets get a stronger sense of Fed exit timing the yen will become the currency of choice for carry trades. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company said, “Yield differentials between the U.S. and Japan have started to widen slightly, showing evidence the market is conscious of the prospect of the U.S. exiting its easy policy. With that perception behind the dollar, if the U.S. heads towards the exit, the dollar-funded carry trade is expected to wane as Japan is seen as more likely to ease further.”