The euro regained ground against the dollar on Tuesday after a better than expected survey of German economic sentiment while the yen touched a seven-year low after a snap election was called in Japan. The euro jumped around half a cent after the German ZEW index rose for the time in nearly a year. Most action was in the yen, however, which passed 117 per dollar, its lowest since 2007, and hit a six-year trough against the euro before recovering.
Prime Minister Shinzo Abe's decision to dissolve parliament and delay a sales tax hike to help the economy, which has tipped back into recession, had been widely flagged, although his hint about more fiscal stimulus was another negative for the yen. "This had been so well advertised ahead of the fact so people are just taking some profit on their long dollar trades," said one London-based trader. Another said the lack of detail on further stimulus had helped halt yen selling for the moment.
Either way, the Bank of Japan is expected to have to print more yen in a bid to revive an economy which has struggled to grow for more than a decade. Fiscal stimulus would also boost Tokyo stocks, which traditionally means a weaker yen due to hedging by Japanese investors.
"The market can be volatile but new asset allocation targets mean government pension funds will be buying equities as opportunities arise and this should limit downside (for Japanese stocks)," Trevor Greetham, Director of Asset Allocation at Fidelity World-wide Investment, said after Abe's announcement. "Currency weakness is part of the story so we favour hedged exposure and we are outright short the yen where this is possible." By 1055 GMT, the dollar was a touch higher on the day at 116.72 yen, having hit a seven-year peak of 117.065 yen.
STEADIER EURO The dollar has made steady progress since July in what is seen as the start of a longer-term rally, based on the diverging fortunes of the US economy compared to Europe and Japan. The yen's dive in the past week is the latest of a series of sharp moves in favour of the dollar, although the euro has stabilised somewhat. It gained 0.3 percent to $1.2520 on Tuesday after the ZEW survey beat expectations.
"All of the news is priced into it and we will really need to see further poor data out of Europe or strong data from the US to move it on," said Graham Davidson, a spot currency trader with National Australia bank in London. "In general I am a dollar bull, but I would say that we're still not seeing any move higher in US market (interest) rates. Without that pillar of support, more gains are going to be harder to come by."
US producer price numbers are also due on Tuesday ahead of minutes on Wednesday of the Federal Reserve's latest meeting. The Australian dollar dipped to $0.8710 after Reserve Bank of Australia Governor Glenn Stevens said investors were underestimating how much the Aussie could fall. That was the latest bout of rhetoric from the central bank aimed at weakening its currency.
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