Improved US Data

The US dollar rose to a three month high against the yen as investors speculate that the Federal Reserve will raise rates sooner than expected and will withdraw emergency measures. The dollar gained on the euro and is close to its first monthly gain since June. Joseph McAlindenv of Catalpa Capital stated, “The massive monetary easing is beginning to show up in terms of an improved economy. The foreign-exchange market should begin to look ahead to a better return on dollar assets. The dollar is a strong currency for 2010.” The greenback has gained 4.9% on the euro in December for a yearly decline of 2.3% against the euro. During the past decade the dollar has fallen about 30% vs. the euro.

Japan’s AA Rating Threatened

Demand for the yen declined after Standard and Poor’s said that Japan’s AA rating could be threatened if Japan fails to stabilize and reduce massive deficits. The dollar has benefited from the perception that the US economy is strengthening and that the Fed will tighten loose monetary policies. The dollar was also supported by year end buying by Japanese investors. Geoffrey Yu of UBS in London said, “The dollar has been helped by year-end buying, plus we have seen some yield hunting by Asian names which has helped dollar/yen.”

BOJ to Keep Rates Low

The Bank of Japan is widely expected to keep rates low and investors say that when markets get a sense of when the Fed will raise rates the yen will become the currency of choice for carry trades. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company in Tokyo stated, “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.” When the Fed will raise rates remains a key question for currency traders who have been watching US data for clues that may lead to the Fed hiking rates.