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 The greenback has shed more than 3 percent over the past two weeks
as expectations of a 2016 rate rise have all but vanished. Concern
over sliding commodity prices, a slowing Chinese economy and the
health of European banks have also dampened dollar demand in favor
of safe-haven assets such as the yen.
Despite a shock move from the Bank of Japan to adopt negative
interest rates two weeks ago, the yen hit a 15-month high of 114.05
per dollar <JPY=> on Tuesday and was up 0.2 percent on the day at
114.89 yen on Wednesday. It has gained more than 6 percent since an
initial fall on the BOJ's move.
Currency strategists at Bank of America Merrill Lynch said in a
research note that the risk of a dollar fall to 110 yen had
increased. This week's European bank sell-off and widening credit
spreads had spurred demand for the Japanese currency, they said, but
the "waning power of policy" had also contributed.
"Before the BOJ's January meeting, we had thought that the 'cost of
acting' outweighed the 'cost of not acting', in a sense that
any...impact of additional easing risks being absorbed by volatile
market conditions caused by global factors, which would signal the
limit of BOJ's ammunition," they wrote.
"That risk has now shown up."
The options market suggests huge demand for yen calls, or right to
buy the yen. Risk reversal spreads, which measure the price gap
between the yen calls and yen puts, are at their widest in favor of
calls since 2010.
The dollar was flat against a basket of currencies at 96.056, having
touched 95.663 on Tuesday, its lowest since October.
BNP Paribas currency strategist Michael Sneyd, in London, said
Yellen - the text for whose congressional testimony is due at 8.30
a.m. ET - would be unlikely to provide any kind of rebound for the
dollar.
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"The most likely is quite a balanced assessment, in which she says
the U.S. economy is doing well, but acknowledges that the market
hasn't taken this first rate hike too well and that this has led to
a tightening of monetary conditions," he said.
"It seems we're likely to remain in this regime where the dollar
continues to lose ground against the euro and the yen."
In times of economic stress, countries or regions running current
account surpluses, as are Japan, the euro zone and Switzerland, are
seen as safer compared with those that have deficits and rely on
foreign capital to finance the gap. The United States and Britain
fall into the latter category.
After data showed Norwegian core inflation unchanged, Norway's crown
rose as much as 1.2 percent.
(Additional reporting by Hideyuki Sano in Tokyo and Masayuki Kitano
in Singapore; Editing by Hugh Lawson)
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