A flare-up in the global currency war is looming, as a resurgent yen and euro threaten to give policy makers in Japan and Europe an incentive to add monetary stimulus.
Japan’s currency advanced versus the dollar for the third time in four weeks, while the euro climbed versus most of its peers. Hedge funds lifted bets on yen strength to the highest in more than three years, and pared wagers against the European common currency. The greenback suffered as sentiment cooled for further currency-supportive interest-rate increases in the U.S. amid sustained market volatility and weaker-than-forecast domestic economic data.
A growing divergence in U.S. growth and monetary policy versus the rest of the world has stalled amid signs the American economy can’t wholly escape a slowdown in China and a patchy recovery elsewhere. That’s weighing on the dollar, while stymieing the economic goals of the Bank of Japan and European Central Bank, which benefit when their currencies depreciate.
Further monetary easing is on the cards if the yen strengthens beyond 115 per dollar and the euro gains toward $1.15, according to Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets, a unit of State Street Corp.
“The currency war is still alive and well,” Ferridge said. “If the dollar starts to suffer, then the ECB or the BOJ come back into play.” State Street has about $2.2 trillion under management.
The yen strengthened 0.2 percent from a week earlier to trade at 116.98 per dollar in New York, after touching its highest in more than four months. The euro advanced versus 11 of its 16 major peers, ending the week at $1.0916.
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, rose 0.7 percent, its best week since November, as higher-yielding currencies slumped, including the Canadian dollar, Mexican peso and New Zealand dollar.
Risk aversion again dominated markets as in oil fell to a 12-year low below $30 a barrel in New York. U.S. data releases provided no respite, showing retail sales and wholesale prices slumped in December. Consumer prices were also stagnant last month, a gauge is forecast to show next week.
Those conditions prompted investors to ditch stocks, speculative-grade bonds and currencies linked to commodities, and channel cash into havens, such as sovereign debt and the yen. A JPMorgan Chase & Co. measure of currency volatility jumped to its highest since October.
Speculators boosted bets on yen gains to a net 25,266 contracts in the week through Jan. 12, the most since October 2012. Hedge funds had been betting against the currency until last week, when Commodity Futures Trading Commission data showed the first bullish positioning in more than three years.
Bank of Japan Governor Haruhiko Kuroda said Friday that officials won’t hesitate to add stimulus if necessary.
The ECB meets to discuss policy on Jan. 21, with minutes from its December meeting that were published this week showing some policy makers wanted deeper cuts to the deposit rate and more bond buying.
“If inflation expectations continue to get de-anchored and the euro continues to rise, we think the ECB is much more likely to swing into action than the Bank of Japan,” said Calvin Tse, the co-head of U.S. currency strategy for Morgan Stanley in New York. ECB President Mario Draghi “knows that he needs to do whatever it takes.”
Morgan Stanley sees further strength for the yen and the euro, said Tse. Additional stimulus from the BOJ is the greatest risk to its yen outlook while more easing isn’t likely, he said.