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Yen May Weaken as BOJ Keeps Zero Percent Rate, Survey Shows

Feb. 6 (Bloomberg) -- The yen may weaken against the dollar for a fourth straight week after a Bank of Japan official said the central bank should stick to its five-year policy of keeping interest rates at zero percent, a Bloomberg survey shows.

Fifty-seven percent, or 30 of the 53 traders, strategists and investors surveyed on Feb. 3 from Sydney to New York advised selling the yen against the dollar. Respondents split on whether to sell the yen versus the euro.

The yen fell for a third straight week against the dollar and the euro after the Federal Reserve and European Central Bank signaled interest rates are headed higher. The premium that two- year U.S. Treasuries pay above Japanese debt widened to the most since May 2001 after BOJ Deputy Governor Toshiro Muto said on Feb. 2 that ``it's too early'' to increase borrowing costs in the world's second-largest economy.

``Yen against the dollar is the most obvious play as there's such a substantial difference in interest rates,'' said Derek Halpenny, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London, in a Feb. 3 interview.

The yen weakened 1.3 percent against the dollar last week to 118.93. It lost 0.7 percent versus the euro, ending at 142.92 yen. The yen also slumped against the pound and 15 other major currencies tracked by Bloomberg. Japan's currency last fell for four straight weeks during the period that ended Dec. 9.

Bank of Tokyo Mitsubishi, a unit of the world's biggest lender by assets, predicts the yen will fall to 128 versus the U.S. currency by year-end. The firm was the most accurate forecaster of the yen versus the dollar in the second and third quarters of 2005, according to Bloomberg calculations.

Policy Meeting

The Bank of Japan starts its two-day monthly policy meeting tomorrow in Tokyo, the first since the government reported that inflation excluding fresh food, the bank's preferred measure of consumer prices, rose 0.1 percent in both November and December. Prices haven't posted back-to-back gains since April 1998.

``The yen will weaken some more,'' said Dale Thomas, head of currencies in London at Insight Investment Management, which oversees $10.5 billion as a unit of HBOS Plc, the U.K.'s fourth- largest bank. ``There is no need to raise rates.''

Thomas predicts the dollar will strengthen to $1.15 per euro and 121.50 yen in three months.

The dollar's gain against the euro and yen last week was anticipated by participants in Bloomberg's previous survey, when 64 percent recommended buying the dollar against the yen and 56 percent advised purchasing it versus the 12-nation currency. The survey correctly predicted the dollar's direction in 30 of the past 52 weeks against the euro and in 26 weeks against the yen.

Six-Week Low

The yen fell to its lowest in six weeks after Muto said on Feb. 2 that it's too early to judge whether the conditions are in place for ending the bank's policy of flooding the economy with cash.

Investors are adding to bets that the yen will fall versus higher-yielding currencies, said Kathy Lien, a currency strategist in New York at Forex Capital Markets LLC. Traders will often borrow in currencies with low interest rates, such as the yen, and invest when the funds' returns are higher, a strategy known as a carry trade.

``You know Japan isn't doing anything with interest rates, and with the dollar you know we're going to have at least one more,'' Lien said.

The gap between two-year U.S. Treasuries and Japanese debt reached 4.26 percentage points last week.

Fed, ECB Outlook

The Bank of Japan last raised rates in August 2000 and reversed the move seven months later, amid investor criticism that it ended a recovery in Japan's economy, which has recorded four recessions since 1991.

The government forecasts the economy will expand for a fifth year in the fiscal year beginning April 1.

The Fed lifted borrowing costs 14 times since June 2004, including a quarter point increase to 4.5 percent on Jan. 31. The ECB raised rates in December for the first time in five years to 2.25 percent and left its benchmark unchanged at a meeting last week.

Expectations for additional increases climbed on Feb. 3 after the Labor Department said U.S. employers added 193,000 jobs last month, and the unemployment rate slid to 4.7 percent, the lowest since July 2001.

Traders on Feb. 3 boosted bets that the Fed's benchmark would reach 5 percent by midyear. The yield on the federal funds futures for July delivery rose 2.5 basis points to 4.895 percent. The level signals that traders see a 58 percent chance that the central bank will lift rates two more times by their June 29 meeting, up from 48 percent a day earlier.

`Reasonable'

Investor expectations for future rate increases are ``reasonable,'' ECB President Jean-Claude Trichet said at a press conference after the bank's Feb. 2 policy meeting. Policy makers will ``exercise vigilance'' to ensure the ``solid anchoring of inflation expectations,'' he said.

``By the middle of the year we will be at 3 percent'' in Europe, said Markus Krygier, head of currency strategy in London at Dresdner Kleinwort Wasserstein. ``It will come as a surprise to the market and will support the euro,'' which will reach $1.40 against the dollar by the end of 2006.