A flare-up in the global currency war is looming, as a resurgent yen and euro threaten to give policy makers in Japan and Europe an incentive to add monetary stimulus.
Japan's currency advanced versus the dollar for the third time in four weeks, while the euro climbed versus most of its peers. Hedge funds lifted bets on yen strength to the highest in more than three years, and pared wagers against the European common currency. The greenback suffered as sentiment cooled for further currency-supportive interest-rate increases in the US amid sustained market volatility and weaker-than-forecast domestic economic data.
A growing divergence in US growth and monetary policy versus the rest of the world has stalled amid signs the American economy can't wholly escape a slowdown in China and a patchy recovery elsewhere. That's weighing on the dollar, while stymieing the economic goals of the Bank of Japan and Europe Central Bank, which benefit when their currencies depreciate.
Further monetary easing is on the cards if the yen strengthens beyond 115 per dollar and the euro gains toward $1.15, according to Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets, a unit of State Street Corp.
"The currency war is still alive and well," Ferridge said. "If the dollar starts to suffer, then the ECB or the BOJ come back into play." State Street has about $2.2 trillion under management.
The yen strengthened 0.2 per cent from a week earlier to trade at 116.98 per dollar in New York, after touching its highest in more than four months. The euro advanced versus 11 of its 16 major peers, ending the week at $1.0916.
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, rose 0.7 per cent, its best week since November, as higher-yielding currencies slumped, including the Canadian dollar, Mexican peso and New Zealand dollar.
Risk aversion again dominated markets as oil fell to a 12-year low below $30 a barrel in New York. US data releases provided no respite, showing retail sales and wholesale prices slumped in December. Consumer prices were also stagnant last month, a gauge is forecast to show next week.
Those conditions prompted investors to ditch stocks, speculative-grade bonds and currencies linked to commodities, and channel cash into havens, such as sovereign debt and the yen. A JPMorgan Chase & Co measure of currency volatility jumped to its highest since October.
Speculators boosted bets on yen gains to a net 25,266 contracts in the week through January 12, the most since October 2012. Hedge funds had been betting against the currency until last week, when Commodity Futures Trading Commission data showed the first bullish positioning in more than three years.
