By Bo Nielsen and Min Zeng
April 14 (Bloomberg) -- The yen may weaken to a record low against the euro after officials from the Group of Seven industrial nations stopped short of saying that the Japanese currency's weakness is a threat to the global economy.
The official statement concluding the G-7 meeting in Washington yesterday said the group will keep monitoring exchange rates ``closely.'' The statement omitted a reference to the yen. The yen fell against 14 of the 16 most active currencies before the gathering ended.
``This basically gives a green light for people to continue selling the yen,'' said Michael Woolfolk, a senior currency strategist at the Bank of New York in New York. He said the yen may drop to 165 per euro by the end of the second quarter.
The yen fell 1.1 percent this week to 161.31 per euro from 159.53 on April 6 and touched 161.43, a record low. The Japanese currency traded almost unchanged at 119.26 per dollar from 119.25 last week. The dollar fell to $1.3527 per euro from $1.3379 per euro on April 6 and reached $1.3554 per euro, the weakest in more than two years.
The euro has strengthened six consecutive weeks versus the yen, the most since December. The common currency received a boost on April 12 when European Central Bank President Jean- Claude Trichet signaled policy makers will continue to increase borrowing costs this year.
Carry Trade
The communiqué resembled the one released after the Feb. 10 meeting in Essen, Germany, urging investors to recognize that Japan's economic recovery is ``on track.''
That message failed to persuade investors to curb borrowing in the yen to invest in higher-yielding assets overseas, a practice known as the carry trade weighing on the yen. Two weeks after the meeting the Japanese currency had weakened 1 percent to an all-time low versus the euro.
International Monetary Fund Chief Economist Simon Johnson said in Washington on April 11 that the carry trade in which investors borrow in low-yielding countries to invest in higher- yielding assets elsewhere isn't necessarily destabilizing for financial markets.
The Japanese economy is expected to grow 2.4 percent this year, up from 1.4 percent last year, according to the median forecast of 12 economists surveyed by Bloomberg. Consumer prices fell 0.3 percent in February, according to government reports, reducing the argument for the Bank of Japan to lift interest rates from 0.5 percent, the lowest among major economies.
Interest Rate Futures
``The carry trades will continue and the yen will continue to weaken,'' said Robert Houck, chief currency trader with Wells Fargo Bank in Minneapolis. Houck said the yen may fall to 167 against the euro over the next four to six weeks.
The ECB's benchmark borrowing costs are 3.75 percent and the Federal Reserve's 5.25 percent, unchanged since June.
Trichet led traders to speculate that rate increases are likely in the months ahead saying borrowing costs are ``accommodative'' to growth in remarks on April 13. The bank left borrowing costs unchanged at 3.75 percent that day.
Traders pushed the yield on the September interest-rate futures contract to 4.28 percent from 4.22 percent on April 5, suggesting they expect the ECB to raise borrowing costs two times by then. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points, or 0.16 percentage point, above the ECB's benchmark rate since 1999.
``I'm not sure what would hold the euro back,'' said Thierry Elias, head of currency trading in New York at Natexis Banques Populaires. Elias said the euro may strengthen to 164 versus the yen.
Accelerating Growth
Bets on an increase in the euro outnumbered wagers on a stronger dollar by a record 104,394 on April 10, figures from the Washington-based Commodity Futures Trading Commission showed. The euro gained 1.1 percent versus the dollar, the most in a month.
The euro region's economy will grow 2.3 percent this year, beating the 2.2 percent estimate for the U.S., the International Monetary Fund said in its semiannual World Economic Outlook released April 11 in Washington.
The spread between the 10-year German Bund yielding 4.22 percent and the comparable-maturity Treasury narrowed 12 basis points to 0.54 percent this week, the lowest more than two years.
The New Zealand dollar was the best performer against the euro and the U.S. dollar among the 16 most active currencies this week. The currency gained 2.34 percent versus the dollar to 73.73 touching 73.83 cents versus the New Zealand dollar, the lowest since May, 2005. The dollar reached 83.36 cents against the Australian dollar, the lowest since Oct. 1990.
Chinese Yuan
U.S. Treasury Secretary Henry M. Paulson said following the G-7 meeting that it was ``crucial'' for the Chinese yuan to have more flexibility ``now.''
The G-7 statement said it was ``desirable'' for the yuan to ``move.'' The yuan's weakness has been blamed for the growth in the ballooning U.S. trade balance and fueled protectionist pressures within the Congress. The U.S. imposed duties on imports of Chinese coated paper last month. Last year the current account deficit, the broadest measure of trade, was a record $856.7 billion or 6.5 percent of gross domestic product.
The yuan's movements are restricted by the Chinese authorities.
To contact the reporter on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net ; Min Zeng in New York at mzeng2@bloomberg.net
Last Updated: April 13, 2007 22:37 EDT
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