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Regional policies support yen
The lower oil prices will offer some support to the dollar and yen, although the prospects for a sustained decline in energy prices appears low. Persistent caution over the Japanese economy is likely to be offset by underlying US vulnerability. Speculation over a wider Chinese yuan trading band will also tend to underpin the yen. There will be tough dollar resistance above 109.5 and the net risks suggest that the dollar will weaken to near 108.0. The dollar traded in narrow ranges against the yen during Monday with strong support at the 109.0 level, but little enthusiasm for pushing the US currency above the 109.5 level. The decline in oil prices and a rebound in the Nikkei index will offer some yen support and the dollar has been struggling in Europe on Tuesday. Indeed, the yen was able to break through the 109.0 level. Japanese central bank governor Fukui stated that the economy was continuing to recover, but the remarks had little impact and there will still be some unease over Japanese trends. Chinese exchange rate policies will remain an important focus. An advisor to the Chinese government stated that currency reform was feasible. The officials are, however, likely to concentrate on a small widening of the yuan trading band rather than an out-right revaluation. This will still offer some support to the yen, primarily through a reluctance to sell the Japanese currency. Analysis supplied by