Dollar climbs to six-year high vs yen, FX volatility soars

[September 10, 2014] By Patrick Graham

LONDON (Reuters) - The dollar hit a six-year high against the yen while trouncing the Australian dollar and several emerging currencies on Wednesday, the latest sign of a long-awaited return of volatility to the world's biggest financial market.

Volatility, which tends to drive volumes of trade by drawing more players into an asset class, is the lifeblood of returns in the currency market and has been reduced to all-time lows by the era of rock bottom interest rates.

The surge in market moves in the past month has been most visible on sterling and another bout of nerves around Scottish independence on Wednesday saw one-month volatility jumping to more than 11 percent, the highest in three years.

Implied volatility on the euro and yen are also heading in the same direction, driven by moves to price in a rise in U.S. interest rates for next year when central banks in Europe and Japan are still discussing further accommodation.

"The dollar strength is the game changer here and we have seen more of it overnight," said a chief dealer with one large international bank in London.

"The action has eased off in the past hour but the trend is well-established and all indications are the dollar should remain well bid going forward."

The repricing of expectations on U.S. rates has been driven on this week by a study by Federal Reserve researchers that showed markets were too conservative compared to the U.S. central bank on the timing of rate rises.

Two-year U.S. Treasury yields have moved within sight of a three-year peak of 0.590 percent in response while the 10-year yield popped back above 2.50 percent after testing such levels on Tuesday.

The dollar gained almost half a percent against the yen to 106.65 yen although it pulled back from session highs of 84.308 to trade at 84.173.

"U.S. two-year rates are moving higher, you have the continuing monetary accommodation in Europe and we've had a run of pretty bearish data in Japan," said Peter Kinsella, a strategist with Commerzbank in London.

"I wouldn't be surprised if we saw dollar-yen at 108-109."

JOCKS AWAY

Aside from the dollar move, attention in morning trade focused on talk of new polls on Scottish independence.
 

A survey by the Survation agency for Glasgow's Daily Record is due to be published at 2130 GMT. There was also a blip for the pound that traders sourced to a web poll by an independent blogger showing a majority for Alex Salmond's nationalists bid to break up the United Kingdom.

Still, the pound has gained a foothold since taking a hammering on Monday and it recovered from the morning losses to trade less than 0.1 percent higher against the euro and dollar..

The dollar also gained against a number of developing world currencies, with India's rupee and Turkey's lira among those suffering.

The Aussie dollar - one of the main beneficiaries of carry trades where investors borrow cheaply in the dollar to buy other higher-yielding currencies - sank 0.7 percent to $0.9138.

The Scottish vote next Thursday will coincide with what will now be one of the most hotly awaited Federal Reserve meetings of recent times, its first after the summer lull.

"We think this trend will continue into the FOMC meeting a week today, given speculation that the Fed is preparing to shift its language on the timing of the first rate hike," ING analysts said in a note.

"We expect the dollar to continue to out-perform, although the focus may remain on emerging markets rather than Europe."

(Editing by Alison Williams)

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