Yen Set For Steepest Drop in 9 Weeks Versus Dollar on BOJ

The yen headed for its biggest weekly decline against the dollar since August amid speculation the Bank of Japan (8301) will boost stimulus measures, reducing demand for the nation’s assets as a haven.

Japan’s currency was poised for a weekly loss versus the euro as Greece moved closer to winning a delayed aid disbursement after a European Union summit at which leaders also committed to creating a regional bank supervisor by year-end. The pound strengthened for the first time in four days against the euro after a government report showed Britain posted its smallest September budget deficit since 2008.

“There’s speculation that the Bank of Japan may add liquidity, also that the government may unveil another stimulus plan for the economy,” said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. “That’s probably one of the reasons behind the yen weakening.

The yen was little changed at 79.26 per dollar as of 6:01 a.m. in New York after dropping to 79.47 yesterday, the weakest level since Aug. 21. Japan’s currency fell 1.1 percent this week, the most since the period ended Aug. 17. The yen traded at 103.39 per euro, having declined 1.8 percent since Oct. 12. The euro fell 0.2 percent to $1.3045.

BOJ policy makers next meet on Oct. 30 and will release updated economic projections for the 2012 and 2013 fiscal years, along with the first set of forecasts for the 12 months beginning in April 2014. At their previous meeting, which ended on Oct. 5, they refrained from additional monetary easing after adding to stimulus in September.

Yield Spread

U.S. two-year Treasury yields exceed similar-maturity Japanese securities by 18 basis points, or 0.18 percentage point. The spread widened to 19 basis points on Oct. 17, the most since August.

“The yen is looking softer on the back of growing expectations about additional BOJ easing and rising U.S. Treasury yields,” said Yasuhiro Kaizaki, president of global markets at Sumitomo Mitsui Trust Bank Ltd. in New York. “The dollar would probably be well-supported against the yen heading into the BOJ meeting.”

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against currencies of six U.S. trading partners, rose 0.1 percent to 79.46.

Pound Gains

The pound rose against the euro after the Office for National Statistics said Britain’s budget shortfall excluding government support for banks narrowed to 12.8 billion pounds ($20.6 billion) from 13.5 billion pounds a year earlier.

“The deficit data was a pleasant surprise,” said Philip Rush, an economist at Nomura International Plc in London. “It shows less fiscal slippage.”

The U.K. currency gained 0.3 percent to 81.22 pence per euro, trimming this week’s decline to 0.8 percent. Sterling appreciated 0.1 percent to $1.6058.

The euro headed for a weekly gain versus 11 of its 16 major counterparts as European Union chiefs meet in Brussels for a second day today to tackle the region’s debt crisis.

The EU will seek to agree on a framework that makes the European Central Bank the main bank supervisor by Jan. 1, according to conclusions released early today. The new system, intended to break the link between banks and governments at the core of the region’s financial crisis, may cover all 6,000 euro- area banks by Jan. 1, 2014.

Greek Prime Minister Antonis Samaras received praise from EU leaders for “the determination of the Greek government to deliver on its commitments.” The Samaras government has been negotiating with the euro area and IMF over 13.5 billion euros of austerity measures for 2013 and 2014 needed to qualify for the release of more loan installments

The euro rose 3.2 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes tracking 10- developed market currencies. The yen dropped 4.5percent and the dollar declined 3.5 percent.

Bloomberg