Tuesday April 5, 2005 - 09:59:04 GMT
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INVESTICA Ltd - www.investica.co.uk
Markets want to target 110.0
The dollar pushed above the 108.0 against the US currency, peaking at 108.45 in Europe on Monday. The US currency remained strong in Asia on Tuesday, pushing to 108.75, the highest level since October 2004.
Interest rate trends will tend to dominate in the short term and the expectations of higher US interest rates will increase the temptation for markets to sell the yen on a speculative basis. There will also be a further temptation for Japanese investors to push funds overseas and the evidence suggests that there is increased domestic interest in higher-yield foreign currency assets. In particular, there will be interest in the high-yield assets such as the Australian dollar. These factors combined will offer further near-term yen support. Although the yield differentials are attractive, the rate premiums are equivalent to around 1 yen per quarter. Any sharp yen adjustment would more than offset the rate advantage.
Japanese fund managers tend to concentrate their overseas buying in the first quarter of the fiscal year and this will offer near-term dollar support. Great caution is required as any sustained increase in risk aversion would force a strategy change from investors, speculators and funds. In these circumstances, the yen would be subjected to sharp upward pressure. There is also the possibility that the Chinese authorities will take advantage of the reduced speculation over a yuan revaluation and a stronger dollar to change the Chinese currency regime which would strengthen the yen. Although the immediate risks appear low, complacency would be very dangerous given the structural Japanese balance of payments surplus.
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