By Jennifer Downey
Dow Jones Newswires
NEW YORK -- With Japan entering its new fiscal year this week, the dollar could soon be back to its highflying ways against the yen, no longer restrained by Japanese repatriation flows or equity support and even boosted by comments from Japanese officials.
More immediately, however, currency markets may have to contend with a marked escalation in violence in the Middle East after Israeli troops attacked Palestinian leader Yasser Arafat's compound in Ramallah on Friday. That could bring a bid to the Swiss franc, a traditional safe haven, and may even put the dollar under some short-term pressure, analysts said.
Today kicks off with the Bank of Japan's quarterly Tankan survey of business sentiment, which is expected to improve for the first time in a year and a half. But traders won't be using any uptick in an otherwise dire reading to bid up the yen, or they will quickly meet a greater force of yen selling, analysts said.
"We're looking at a new range" in the 135 yen to 139 yen band in the coming months, aided by resumed efforts from Japanese officials to soften the yen through rhetoric, said Lara Rhame, currency economist at Brown Brothers Harriman in New York.
Late Friday in New York, the dollar was at 132.77 yen, up from 132.65 yen Thursday in New York. Meanwhile, the euro was at 87.16 cents, up from 87.04 cents Thursday in New York. The dollar was also at 1.6823 Swiss francs, down from 1.6846 francs Thursday, while sterling was at $1.4258, up from $1.4248 in New York on Thursday.
Noting that foreign demand for Japanese stocks dropped off even ahead of the fiscal-year close, David Mozina, head of global foreign-exchange and fixed-income strategy at Banc of America Securities in New York, says he is also expecting yen weakening to pick up apace.
"We are very confident of our Y140 to Y145 [dollar/yen] call over the next few months," he said.
The dollar's gains against the euro aren't so assured in the near term, however. While the euro has been unable to break out of its narrow range of 86 to 89 cents on the dollar, the dollar has been equally penned in even as evidence of a U.S. economic rebound continues to build. "A euro rally is an oxymoron, but the euro has been quite resilient in the face of a lot of good U.S. data," Ms. Rhame said.
Several chances to test this euro resilience arise this week, with the release of some top-tier U.S. economic reports, including national gauges of manufacturing and service-sector activity and the March employment report. If today's Institute for Supply Management Manufacturing Index for March posts another monthly rise, but the euro still manages to hold around 87 cents, it could herald a weaker tone in the dollar, Ms. Rhame said.
But given that U.S. productivity growth is coursing ahead at a faster clip than that of the euro zone, "we still remain adamant that if there's any risk going forward it's for the euro," Mr. Mozina said.
In addition, the sharp rise in oil prices should lead the euro lower against the dollar, he said. Oil makes up 10% of the consumer-price-index components in the euro area, and "there's concern if oil starts to go up, the European Central Bank will become a little more hawkish," he said. Both the ECB and the Bank of England will make monetary policy decisions this week, and both central banks are widely expected to keep interest rates on hold. But a rate rise tomorrow from the Reserve Bank of Australia would be "no surprise," given the momentum in the country's economy, Mr. Mozina said. At 4.25%, Australia's cash-rate target is comparatively high, and another rate increase could make carry trades even more tempting -- helping the Australian dollar continue its recent strengthening trend.
The Australian dollar "has decoupled from the euro, and it's being traded more on its own domestic fundamentals," which are quite solid, Mr. Mozina said. "But I'm still cautious on how much further it can progress. A lot of good news has priced in," he added.
Friday's developments in the Middle East caused a spike in the Swiss franc, which is considered the traditional safe-haven currency in times of global unease.
Brown Brothers' Ms. Rhame said another expansion in the Israeli-Palestinian conflict this week could boost the Swiss currency further, but that this would mainly be to the detriment of the euro and yen. Others see the dollar at risk, however, given the complicated political role played by the U.S. in the region and the challenges it faces keeping a broad coalition among the Arab states in support of its War on Terrorism. "If the violence escalates and the U.S. is seen as supporting it, that hints to me that this could be dollar-negative," said Larry Kantor, head of global foreign-exchange strategy at JP Morgan Chase in New York. The problem for safe-haven seekers is that the franc's caretakers, officials at the Swiss National Bank, have made clear that they want a softer franc against the euro. The SNB even cut the key interest rate last week in attempt to ward off the franc's rise.
"The SNB has found itself in this corner before, where world events conspire against them," Ms. Rhame said.