Yen
Interview: Merrill Lynch & Co.---Kontopoulos, Yianos---Currency Strategist
the dollar was higher against its trading partners, once again, the japanese yen, euro and pound, the dollar holding on to gains this week although the european central bank decided not to cut interest rates as some had forecast. the dollar did reach a four-month high against the yen after one japanese official said the yen’s recent drop isn’t over and the euro fell after that lack of move from the european central bank. joining us to look at the currency market , yianos kontopoulos, chief global foreign exchange strategist at merrill lynch, joining us from new york. much going on in the currency markets today with the euro and yen and talk about what will happen to the chinese yuan. let me start with the yen and comments from japan that the yen’s drop isn’t over. but earlier this week, alan greenspan suggested that the japanese might be done with intervention. what’s going to drive the yen lower in that case?
>> i think that ultimately the decision should be left on the japanese side and apparently they have definitely structured their intervention slightly different way, very significant, of course, for the foreign exchange markets in terms of being more aggressive in previous months where they were defensive, accommodating the decline in the dollar. at the end of the day what will matter is the verification of the growth upside in japan, making japanese officials more comfortable with yen strength.
>> going around around the world to the euro, everyone has been waiting to see whether or not the u.s. jobs figures are going to be strong. will that have a major effect on trading tomorrow if we get the kind of number that many anticipate?
>> i think to the extent that it fits through the fixed income market , it will definitely have an effect into the foreign exchange markets . the expectations right now, according to the bloomberg survey, a figure roughly above 100,000 but the figure has been volatile in the past. what’s interesting to ponder is what will happen to the markets if it’s close to consensus because that’s hard to gauge. otherwise, if it goes to either of the two extremes, it will filter through, especially to the euro.
>> there’s general expectation that the euro will strengthen again if we come close to consensus, does the dollar’s rally stop then?
>> if we are close to consensus, it could go literally either way. we will need to see verification from other data points before we decide which way to move on the next stage. i think the fairly certain thing is that we don’t say at the current level on euro dollar for the next few days. it will be hard to stabilize at this level.
>> do you agree that the euro starts to get stronger again in the long term?
>> yes, we do. in the context of three things related to the structural measures of global imbalances that relate primarily to the u.s., in the context of the u.s. economy offering a very low yield while having very significant external financial needs and in the context of not really having a redistribution of global growth yet, it will be hard to remove the drivers behind the overall trend in the dollar that we have had in the last two years so according to us, this trend is not complete yet.
>> the other major currency that makes a lot of news in the united states these days is china with a lot of people on capitol hill getting very antsy about whether or not the chinese will revalue the realmem bee, what’s your view?
>> our view is that in essence the chinese authorities will do what is in its best interests and we think at some point towards the end of this year it will be in their interestings to revalue the currency from the pegged level and move it to a trade-weighted exchange rate, which makes sense from other macro perspectives.
>> you say it’s because it’s in their interests. why?
>> primarily because what you alluded to is external pressures related significantly towards the behavior of the trade balance between china and the u.s., bilateral issue. more important component for china appears to be growth, employment, financial stability and inflation. what we see thus far with the liquids on the capital account over the past few months is an accumulation of money into the system pushing inflation steadily and significantly expected to intensify towards the end of the year. once it crosses a certain pain threshold which we anticipate towards the end of the year, the chinese authorities will preemptively strike.
>> not until the end of the year?
>> most likely. hard issues to pin down, but according to our models, towards the end of the year would be the prudent timing of the chinese and i think we’ll see evidence of that in the third quarter but they will wait.
>> thank you very much, yianos kontopoulos, chief global foreign exchange strategist at merrill lynch. merrill lynch is a passive minority investor in bloomberg lp, the parent company of bloomberg television. we’ll have more on the securities and exchange commission’s subpoena of the new york stock exchange’s directors in the controversial pay package of former director richard grasso.
