(MENAFN- Gulf Times) As crises recede, the yen fades.
That's the lesson investors should take away after being whipsawed by the Japanese currency last week amid the financial- market turmoil triggered by negotiations to provide Greece with a bailout and the collapse of Chinese stocks.
Japan's currency is poised to weaken after slumping by the most in more than two years against the euro Friday on optimism that European policy makers will craft a deal for Greece. Investors sought refuge in the yen earlier in the week as Chinese stocks plunged and European officials wrangled over bailout proposals. The Bank of Japan meets on July 14 to 15.
"You should see some of that bullish yen trade come off" if there's a resolution to the Greek crisis, Bipan Rai, director of foreign-exchange strategy at Canadian Imperial Bank of Commerce's CIBC World Markets unit, said by phone from Toronto Friday.
The yen fell as much as 2.5% Friday to 137.29 per euro, the biggest loss since April 2013. It fell 0.4% this week. The yen was little changed on the week at 122.81 per dollar.
Japan's currency is down 2.9% in the last three months, making it the third-worst performer among 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
During times when investors become risk-averse, speculative traders unwind carry trades - borrowing in lower-cost countries to buy higher-yielding investments - and need to buy back currencies used to finance the transactions.
The ultra-low interest rates in Japan have made it a favored funding currency for years, while leaving it vulnerable to recent swings in sentiment.
"We continue to forecast a gradual, yet sustained, depreciation of the Japanese yen," Sam Lynton-Brown, a foreign- exchange strategist at BNP Paribas SA in London, said in a note Friday. The bank forecasts the currency will trade at 130 per dollar by the end of the year.
The yen will fall to 126 per dollar by year-end and to 127 in the first quarter of 2016, according to the median forecast of analysts surveyed by Bloomberg News. The yen may drop to 125 per dollar when the US Federal Reserve raises interest rates, in contrast with the BoJ's easing policies, CIBC's Rai said.
Fed Chair Janet Yellen said in a speech Friday in Cleveland that she still expects to raise interest rates this year, and repeated that the subsequent pace of increases will be gradual. Yellen identified Greece's debt crisis as one cause of uncertainty that may impact the timing of a rate increase. She did not mention China in her speech.
The BoJ increased its bond purchases to as much as ¥12tn ($100bn) per month last October in an effort to stimulate the economy, weighing on the yen and on Japanese interest rates.
The euro and stocks rose Friday on the prospect of a deal to end a standoff between Greece and its creditors. In an 11th- hour bid to stay in the currency union, the Greek government offered to meet most of the demands made by lenders in exchange for a third rescue to cover the nation's financing needs through 2018.
"Investor risk sentiment has improved overnight driven by renewed hope that the Greek government can reach a last-minute agreement with its creditors to avoid default and Grexit," said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in London. That's putting pressure on the yen, he said.
Prime Minister Shinzo Abe said in a speech in Tokyo this week that the longer-term weakening of the nation's exchange rate had begun to restore the confidence of the Japanese people.
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