Currency Markets: Should You Worry About Our U.S. Dollar Weakening?

The dollar moved down to its worst level since Dec. 17 versus the yen on Tuesday, after Treasury yields dropped as demand for alternative investments rose in the wake of plunging oil prices. The currency was also pressured by weakness in U.S. stocks and surprisingly weak U.S. wage data on Friday.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management and Co-Founder of, said she expect the dollar to experience a deeper near-term pullback towards the 116.75 to 117.50 range, but will later return to a 7-1/2 year peak of 121.86 marked last month on the EBS trading platform.

Crude oil futures dropped almost 5.7 percent to $45.62 a barrel, the worst level in more than 5 1/2 years.

Benchmark 10-year U.S. Treasury yield fell to 1.907 percent in Asian trading, lower as compared to its U.S. close of 1.912 percent on Monday, the lowest on a closing basis since May 2013. The yield on the 30-year Treasury note was near the record low of 2.44 percent that was suffered in July 2012, while the five-year Japanese government bond yield dropped to zero for the first time.

“Lower oil prices should be good for the U.S. economy, but I think people worry about disinflation, even in the U.S., so the market may be worried that lower inflation will postpone the Federal Reserve’s hiking plans,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

“I think the U.S. dollar will recover, but it could take some time,” he added.

The yen strengthened against all of its 16 major counterparts, extending gains for a third day against the dollar, and is the best-performing currency this year. Goldman Sachs Group Inc. lifted its expectations for the U.S. dollar versus the euro and most Asian currencies. Australia’s dollar moved closer to a four-week high after upbeat Chinese trade data. Malaysia’s ringgit moved down for second day.

The decline in oil price is currently spurring risk aversion,” said Junichi Ishikawa, market analyst at IG Markets Securities Ltd. in Tokyo. “There’s a low probability of risk appetite returning completely unless oil prices see a clear floor. As the risk aversion phase deepens, pressure is rising for the yen to strengthen.”

The yen rose to 118.22 per dollar, at last check, after adding 1.1 percent during the previous two days. Japan’s currency was floating around 140 per euro. The dollar edged lower to $1.1842 per euro after hitting $1.1754 on Jan. 8, that was the best since December 2005.

Japan’s trade deficit is expected to see a cut of around $500 million due to the 44 percent plunge in oil since the end of October, said Jens Nordvig, managing director of currency research at Nomura Holdings Inc. in New York.

“We’ve had a couple years where we’ve been very focused on trading the yen from the short side, but we actually haven’t been short for quite a few months,” Nordvig said, referring to a bet the currency will weaken. Low “oil prices are positive for Japan’s trade balance.”

The yen is likely to reach 120 per dollar by the end of this quarter, Nomura forecast. The yen has made gains of 4.2 percent in the past month, the top gain among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar moved up 3.7 percent, while the euro was down 2.1 percent.

Goldman Sachs expects the dollar to reach at $1.14 per euro in three months, up versus prior forecast of $1.23. The investment bank raised its 1-year target to $1.08 from $1.15. The company said in a recent research note its three-month target for the dollar against the Chinese yuan has been increased to 6.20 from 6.16, and against the South Korean won from 1,100 to 1,130.

The Bloomberg Dollar Spot Index, a measure of the value of the United States dollar relative to 10 foreign currencies, stood at 1,142.40 after hitting the 1,149.71 mark on Jan. 8, the best level since 2004.

Australia’s dollar strengthened as China, its largest trading partner, said exports jumped 9.7 percent year-over-year in December, beating the 6 percent average forecast in a Bloomberg News survey, and imports dropped 2.4 percent versus expectations for a 6.2 percent decline. The Aussie grew 0.3 percent to move at 81.79 U.S. cents after rising to 82.55 cents Monday, the best level since Dec. 16.

The ringgit fell following reports that CIMB Group Holdings Bhd. and RHB Capital Bhd. are on track to cancel the three-way merger that would have formed Malaysia’s biggest banking group. The reports claim terms for the deal, declared in October, were not good as the industry outlook worsens. Malaysia’s currency declined 0.4 percent to reach at 3.5812 per dollar after losing 0.2 percent Monday.

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