TOKYO, May 7 - The Japanese authorities' efforts to limit swings in the yen against the dollar have made the euro more attractive to dealers, with the four-year-old currency's higher interest rates also luring yield-hungry investors. The Tokyo foreign exchange market, traditionally dominated by dollar/yen trading, is seeing more trading in the euro as bank dealers look for dynamic price moves and as Japanese investors rush into euro-denominated bonds, brokers say. "Trading in the euro is increasing in Tokyo as more Japanese dealers and investors take positions in the currency. If more investors hold euros then there is more hedging demand, which results in higher volume," said Koji Fukaya, chief forex analyst at Bank of Tokyo-Mitsubishi.
"At the same time, the dollar/yen is losing its attraction as a dealing currency as it is being intensely managed by the Japanese monetary authorities," Fukaya said. The euro has surged about 30 percent versus the dollar and 17 percent against the yen over the past year. Calculations from a daily Bank of Japan survey show the Tokyo market's daily volume in spot euro/dollar trade was an average $4.78 billion in April, against $5.28 billion in March, $4.12 billion in February and $3.87 billion in January. Last year, daily turnover in euro/dollar in Tokyo was around $2.0-3.0 billion, except during the May-July period when volume jumped due to intervention by the Japanese authorities.
In contrast, daily turnover in dollar/yen has been rather modest despite this year's intervention, analysts said. Average volume in spot dollar/yen trade amounted to $8.67 billion per day in April, versus $8.75 billion in March, $7.83 billion in February and $8.80 billion in January. "In past years, our perceptions were that volume in euro/dollar only amounted to something like one-tenth of turnover in dollar/yen," said Yoshimitsu Sasago, general manager at Tokyo-based currency broker Meitan Tradition Co Ltd. "But that has changed dramatically, especially from the start of this year, with the euro increasing its presence in Tokyo," Sasago added.
INTERVENTION KILLS DOLLAR/YEN
The yen's attraction to investors outside Japan has been tarnished by a decade-long recession that has kept interest rates glued at razor-thin levels and caused a prolonged slump in stock prices. Dealers' appetite for trading dollar/yen has been diminished by yen-selling intervention by the Japanese authorities as they have sought to protect the export-led economy. "Basically (in Tokyo), the dollar/yen rate still remains the key currency due to trading from domestic exporters...but it is not being used as a dealing currency because it moves too narrowly," Meitan's Sasago said.
One- and three-month options volatility for dollar/yen has been pegged below 9.0 percent recently compared with about 10 percent at the start of the year. Although Japan refrained from intervening in the market in April, it spent a total of 2.3 trillion yen ($19.56 billion) in the first quarter to hold the yen down. During the period, the authorities conducted "stealth" intervention, selling the yen discreetly through a small number of Japanese banks, dealers said. "Basically, many foreign banks tried to limit dealing in dollar/yen to as little as possible, mainly because Japan could conduct stealth intervention at any time," one forex broker said. "Foreign banks had to give up dealing in dollar/yen because it was getting tough to make a profit battling against the banks which were backed up by orders from the Japanese authorities."//