The yen weakened to 120 per dollar for the first time since July 2007, as policy makers’ decisions to expand monetary stimulus and delay a consumption tax increase highlight the risks the economy is deteriorating.
The yen has plunged 9 percent since the Bank of Japan on Oct. 31 increased the annual target for expanding the monetary base to 80 trillion yen ($667 billion), and Prime Minister Shinzo Abe delayed a second bump to the sales levy by 18 months, after the first in April sent the economy into recession. Abe is forecast to score a second landslide victory in a Dec. 14 election.
“It’s still the divergent-growth, divergent-policy story,” Robert Sinche, a global strategist at Amherst Pierpont Securities LLC in Stamford, Connecticut, said by phone. “We are seeing capital flows out of Japan, and I think that helps bring capital out and continues this movement down in the yen.”
Japan’s currency fell to as low as 120.17 against the dollar before trading at 119.88 as of 10:02 a.m. New York time, down 0.1 percent.
The yen has been trading between 117 and 120 per dollar for almost three weeks, as traders trying to push the yen weaker ran into a wall of options centered around the price.
There were $3.01 billion of over-the-counter foreign-exchange options on the dollar-yen with a strike price of 120 that expired at 10 a.m. New York time, according to Depository Trust Clearing Corp. data tracked by Bloomberg. The strike price is the exchange rate at which call option holders can buy the underlying currency and put owners can sell.
Some options contain so-called barriers, causing the contract to either expire or to be activated if the pre-set exchange-rate level is reached. These types of contracts can also cause traders to attempt to push a currency through or away from barrier triggers. The barriers are often used as they reduce the cost of the strategy because they decrease the odds the options will be profitable.
The unprecedented stimulus by the Bank of Japan contrasts with the Federal Reserve’s discussion about raising interest rates as the world’s biggest economy strengthens, prompting further weakness in the yen. The Japanese currency will slide to 124 per dollar by the end of 2015, according to the median estimate of analysts in a Bloomberg survey.
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