Dollar Trades Near One-Month High Versus Yen on Rate Outlook

Oct. 26 (Bloomberg) -- The dollar traded near a one-month high against the yen on speculation the Federal Reserve will increase interest rates sooner than economists forecast.

The dollar may gain versus higher-yielding currencies such as Australia’s dollar after Philadelphia Fed President Charles Plosser told Bloomberg Radio last week his “instinct is the time for raising rates will be before many of my colleagues” think it is. Fed officials are likely to discuss next month how and when to signal the possibility of higher U.S. interest rates, the Wall Street Journal reported without citing anyone.

“As the global economy stabilizes from the financial turmoil, it is unavoidable for central banks across the globe to review credit-easing measures and trim or even terminate them at some point,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management (Japan) Co., a unit of France’s third-largest bank. “Risk trades, funded by cheap dollars, may face unwinding.”

The dollar was at 92.10 yen as of 7:46 a.m. in Tokyo from 92.06 in New York on Oct. 23. It earlier touched 92.21 yen, the strongest level since Sept. 21. The U.S. currency was unchanged at $1.5008 per euro. The greenback touched $1.50 on Oct. 21 for the first time since August 2008. Japan’s currency changed hands at 138.22 per euro from 138.15.

The Federal Reserve’s benchmark interest rate is near zero, compared with 3.25 percent in Australia and 2.5 percent in New Zealand, attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

FOMC Meeting

Members of the U.S. central bank are beginning to consider the best communications strategy for letting the market know that an “extended period” of record-low rates will draw to an end, the Journal reported on Oct. 24. The issue may be “on the table” when the Federal Open Market Committee meets Nov. 3-4.

At their most recent meeting, on Sept. 23, members of the Fed’s policy making Open Market Committee agreed to keep the benchmark rate in a range of zero to 0.25 percent, where it’s been since December 2008. In a statement following the gathering they said economic conditions will warrant keeping the rate low “for an extended period.”

The low rates will risk creating future inflation, Plosser said, particularly given the more than $1 trillion the Fed has pumped into the economy by expanding its balance sheet.

“It’s a whole notion that ultimately monetary policy does work with a lag,” he said last week. “If you wait until inflation’s here, it’s too late, so you have to be forward looking.”

Futures Positions

Futures traders decreased their bets that the yen will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 31,185 on Oct. 20, compared with net longs of 33,339 a week earlier.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 36,033 on Oct. 20, compared with net longs of 43,367 a week earlier.