Yen rises with US dollar on demand for safety after Paris attacks

by NZ Adviser16 Nov 2015
(Bloomberg) -- The yen advanced along with the U.S. dollar as foreign-exchange markets opened for the first time since the Nov. 13 attacks in Paris, with investors seeking assets that trade as havens.

While the euro weakened, losses may be limited by its emergence as a refuge asset in recent months. The shared currency had pared declines in the final 90 minutes of trading in New York on Friday as news of the assault started to emerge.

The violence in one of Europe’s most heavily-policed cities may heighten investor concern about the global political and economic outlook. The dollar is often bought amid turmoil as the world’s reserve currency while Japan’s current-account surplus makes it attractive when investors seek safety. The Australian and New Zealand dollars are vulnerable to declines when higher- yielding assets are sold.

“The initial knee-jerk reaction in the markets could be one of risk-off given that the tragic events in Paris could add a layer of geopolitical risk,” Valentin Marinov, head of Group- of-10 foreign-exchange strategy at Credit Agricole SA’s corporate and investment bank unit in London, said before markets opened. “The liquid safe-haven currencies like euro and yen could benefit at the expense of risk-correlated and commodity Group-of-10 currencies.”

Yen advances
Japan’s currency advanced 0.2 percent to 122.34 per dollar as of 6:46 a.m. Sydney time on Monday, after rising 0.4 percent last week. The euro fell 0.4 percent to $1.0735, having gained 0.3 percent last week. The Aussie weakened 0.2 percent to 71.13 U.S. cents and the kiwi declined by the same amount to 65.26 U.S. cents.

The dollar gained against all of the Group of 10 major currencies except for the yen.

Record-low interest rates in the euro region have boosted trades where investors borrow cheaply in euros in order to purchase higher-yielding assets, including equities. In times of market turmoil those trades may be unwound, bolstering the euro, even though the attack was directed at the currency bloc’s second largest economy. Stock markets in the Middle East fell during Sunday trading.

ECB stimulus
While the euro is the world’s second-most traded currency, it does not have the reserve status of the U.S. dollar. The currency has been weakened by the European Central Bank’s stimulus program, a plan that the institution was considering expanding even before the attacks. The ECB may “provide some added, at least verbal, support to the economy and markets if economic risks are deemed to have increased,” Credit Suisse Group AG analysts Oliver Adler and Joe Prendergast wrote in a note on Sunday.

“One of the most notable shifts in market dynamics in recent years has been the declining impact of geopolitical events on sentiment,” Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp. in London, wrote in a note. “This has been a direct function of quite how accommodative monetary policy globally has already become and how investors now expect central banks to react when adverse events occur. Given what we already know about how the ECB is likely to move in December it therefore seems reasonable to suppose that a similar dynamic might emerge this week.”

The currencies of commodity-producing nations have slid this month with South Africa’s rand and New Zealand’s dollar leading the declines amid market speculation that the Federal Reserve will raise interest rates in December.

“It’s difficult to make a call on how the financial markets will react to the Paris tragedy,” Stephen Jen, co-founder of London-based hedge fund SLJ Macro Partners LLP and a former economist at the International Monetary Fund. “It’s not clear what will happen to the euro. The market already has a Fed issue to deal with and what happened in Paris just added another layer of uncertainty.”

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