Dollar Trades Near Two-Week Low Versus Yen on Fed Rate Outlook

June 18 -- The dollar traded near the lowest level versus the yen in two weeks as slower-than-forecast monthly inflation in May led traders to reduce bets the Federal Reserve will boost the target lending rate.

The yen rose against the Swedish krona and South African rand on speculation Japanese investors are selling foreign assets to buy shares of domestic banks. The pound fell against the euro as Bank of England minutes indicated policy makers voted unanimously this month to extend asset purchases to keep interest rates low.

“The Fed is concerned about the talk of inflation expectations,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank. “They very much want to squelch and curb that talk.”

The dollar traded at 95.82 yen at 6:21 a.m. in Tokyo, after falling 0.7 percent yesterday and reaching 95.52, the lowest level since June 3. The U.S. currency was at $1.3947 per euro, following a 0.8 percent decline. The euro was little changed at 133.65 yen.

U.S. central bank officials are considering using next week’s policy statement to suppress any speculation they’re prepared to raise interest rates as soon as this year. Fed staff examined the Bank of Canada’s public intention of forgoing an increase until 2010 without concluding the statement proved effective, according to a person familiar with the matter.

Rate Expectations

“Policy markers are likely to be getting concerned about the extent to which markets are now building in rate-hike expectations,” analysts led by Hans-Guenter Redeker, London- based global head of currency strategy at BNP Paribas SA, wrote in a note yesterday. “We are once again switching back to our core long currency recommendations against the dollar.” A long position is a bet a currency will rise.

Interest-rate futures indicated yesterday a 45 percent chance the Fed will boost its target rate of zero to 0.25 percent for overnight lending between banks to at least 0.5 percent by December, down from 64 percent odds a week ago.

Consumer prices increased 0.1 percent in May, after no change in the prior month, the Labor Department reported yesterday. The median forecast of 75 economists surveyed by Bloomberg News was for a 0.3 percent increase. In the 12 months ended in May, costs fell 1.3 percent, the biggest decline in almost 60 years.

‘Dollar to Weaken’

“Folks last week talked about the Fed hiking, which is nonsense,” said Jack Iles, who oversees $2.5 billion in assets at MFC Global Investment Management in Boston. “The underlying U.S. economy is extremely weak. In the currency market, we are moving into a more reasonable range, but the longer-term trend is for the dollar to weaken.”

The yen gained 1.1 percent to 12.17 versus the Swedish krona and 0.9 percent to 11.85 against the rand as Sumitomo Mitsui Financial Group Inc., Japan’s second-biggest bank by market value, planned to raise as much as 923 billion yen ($9.4 billion) in the biggest share sale in Japan since 2001.

Sumitomo and its two largest rivals announced plans to raise more than 4.6 trillion yen since November as souring investments and bad loans forced them to book a combined loss of 1.22 trillion yen in the year ended March 31.

“There are tremendous retail clients bailing out of yen shorts on the back of banks’ new issues,” said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. A short is a bet a currency will fall.

Weaker Pound

The pound dropped the most in almost two weeks against the euro after minutes of the Bank of England’s June 4 meeting showed policy makers said it was too early to assess the impact of the plan to spend 125 billion pounds ($206 billion) of new money on assets to promote economic growth.

BOE Governor Mervyn King said in a speech in London yesterday that Britain’s banking system may need to raise more capital to finance the economic recovery as officials keep printing money.

Sterling weakened as much as 1.2 percent to 85.36 pence per euro yesterday, the biggest decline since June 4. The pound was little changed at $1.6405.

Norway’s krone rose 0.7 percent to 6.3776 versus the dollar and was little changed at 8.8943 against the euro as Norges Bank said the overnight deposit rate will rise to 1.5 percent by 2010 after policy makers cut the benchmark by a quarter-percentage point to 1.25 percent yesterday.

UBS AG, the world’s second-largest currency trader, advised clients to buy the krone versus the euro after Norges Bank became “the first central bank globally to predict rate hikes at the end of this down cycle.”

The krone will advance to 8.54 per euro, London-based UBS currency strategists Geoff Kendrick and Geoffrey Yu wrote in a research note yesterday.