Indian companies to feel added pressure.
Indian companies which had used the Japanese yen to hedge their currency risk could face the new impact of its strengthening.
The US dollar today dropped to a 14-year low against the yen. The currency strengthened 0.5 percent to the dollar, to 86.89 in morning trade in London, Bloomberg data showed. The greenback fell to the lowest level since July 1995, after the Federal Reserve said on Tuesday that its drop was orderly, a signal to traders that the US will not prop up the currency as the world’s largest economy recovers from a recession.
Bankers said Indian companies that had used the yen to hedge their risks over the past 12-15 months could get away largely unscathed, but those that were hit last year, when the yen fell below the 100 mark against the dollar, could be in for fresh trouble.
In addition, K Harihar, head of treasury at First Rand Bank, a South-African outfit, said companies with yen-denominated loans would see their liabilities grow. “However, the actual impact will be limited, since most of them had covered this (either swapped liabilities or hedged the exposure) when the first round of yen appreciation began (around April).”
Indian companies used the yen and the Swiss franc to hedge their risks, as the two currencies were seen to be stable. Many companies had issued bonds or raised loans in yen to take advantage of low interest rates in Japan. Those who kept their yen exposure partly open would face the brunt of appreciation. Bankers said many of their clients were surprised by the extent of appreciation.
"A number of firms had entered into derivatives’ deals when the yen was at 110-115 to a dollar. These firms will be affected, since they had not expected the dollar to drop to as low as 86. However, only companies with old derivatives’ deals will be affected. Very few new derivatives’ deals were struck in the past 18-24 months and the market has been nearly dead," said the treasury head of a large private sector bank.
Basix Forex and Financial Solutions CEO K N Dey said some Indian companies, importing Japanese goods, had hedged themselves when the yen was ruling at around 100 to a dollar. “They would have to pay an additional 13-14 yen per dollar. This may dent their bottom line.”
Bloomberg adds: In Tokyo, Japanese Finance Minister Hirohisa Fujii said the government needed to take action on abnormal currency movements, remarks that failed to prevent the yen’s advance.
“I am watching these movements. Right now, it’s time to watch them closely,” he told reporters. “We need to take appropriate action against abnormal movements.”
