Higher Italian bond yields weigh down on euro

London: The euro fell against the dollar and yen on Wednesday after Italian borrowing costs rose at a bond auction and with investors looking for more gains in the US currency if retail sales there showed a strong reading.

US retail sales data for February, due at 1230 GMT, is forecast to show a 0.5 per cent increase and is likely to give a broad lift to the dollar as it would add to speculation that the US Federal Reserve may wind up its ultra loose monetary stimulus later this year.

The dollar edged up from session lows against the yen but was still lower on the day as some investors continued to book profits on hefty bets in favour of the U.S currency.

The yen’s recovery against the dollar is likely to run out of steam as some hedge funds and long-term investors rebuild positions against the Japanese currency, given expectations of aggressive monetary policy easing from the Bank of Japan in coming months.

The euro was down 0.3 per cent on the day against the dollar at $1.3001, not too far from recent three-month low of $1.2955. Middle East accounts were cited as main sellers.

The Italian debt auction saw weaker demand and higher borrowing costs compared to previous auctions due to the political uncertainty in Italy and this hurt the euro.

“The headline yields and the fact they had to pay slightly more than last time was a tad disappointing,” said Neil Jones, head of hedge fund FX sales, at Mizuho Corporate Bank. “I can understand the hesitancy [for Italian debt] and that is why the yields are higher and this has weighed on the euro as well.”

Against the yen, the euro was down 0.7 per cent at 124.40 yen.

The dollar was down 0.4 per cent against the yen at 95.65 yen, some way off the three-and-a-half-year peak of 96.71 yen on Tuesday, where it had brought its year-to-date gains to more than 10 per cent. Traders said there were dollar bids at 95.40 yen by investors betting on the dollar regaining some lost ground.

Yen weakness intact

Analysts said yen weakness was firmly intact and it would continue to trend lower after dovish former currency diplomat Haruhiko Kuroda takes over as the BoJ’s next chief.

Kuroda, whose nomination along with Kikuo Iwata and Hiroshi Nakaso as deputy governors, is expected to be signed off by the Japanese parliament later this week.

All have vowed to pursue radical measures to lift Japan’s inflation rate to 2 per cent — something that has not happened for almost two decades.

“We have seen some profit taking in dollar/yen which has helped the yen recover ground,” said Adam Myers, European head of FX strategy at Credit Agricole. “But with the nomination process likely to go through... we could see that end and dollar/yen will resume its uptrend.”

Mizuho’s Jones expects the dollar to touch 100 yen by June.

But in one telling sign that the relentless selling pressure on the yen since last November may be easing, risk reversals, which gauge relative demand for put and call options, flipped towards yen calls or bets that the currency will gain.

The one-month risk reversals was traded at 0.1 vols in favour of yen calls, flipping from around 0.5 in favour of yen puts just last week. The three-month risk reversal and the one-year were also showing a bias for yen strength.

“This flip in risk reversals shows banks’ option desks are short of yen calls at a time when their customers want them,” said Credit Agricole’s Myers.

Traders said the flip in risk reversals was mainly due to renewed options interest to hedge long dollar positions.