Last updated: December 28, 2012 5:23 pm

Soft data underscore yen weakness

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The Japanese yen fell to its lowest in more than two years against the dollar on Friday, before finding support from haven buying after the latest fiscal cliff talks remained deadlocked.

The yen has been the most actively traded currency in recent weeks, and has fallen 8 per cent against the dollar since mid-November, when former prime minister Yoshihiko Noda announced the general election that was won this month by Shinzo Abe, who has vowed to fight deflation by easing monetary policy and weakening the yen.

A batch of mostly weak economic data on Thursday and Friday, including a much weaker-than-expected November industrial production reading, down 1.7 per cent from October, underlined the case for the stimulus that has been promised by Mr Abe.

The yen has continued to weaken as the new administration has applied pressure on the Bank of Japan to adopt a higher inflation target than the current 1 per cent goal. Meanwhile, the BoJ has resumed its asset purchases, adding a further Y10tn to its easing programme.

Although the yen has weakened substantially, it has not all been one-way traffic. The US backdrop of fiscal cliff talks – discussions between President Obama and Congress on how to avert the potentially recessionary impact of new year tax increases and spending cuts – has occasionally prompted bouts of risk aversion that have seen the yen rise on haven buying.

The Japanese currency was volatile on Friday as volumes remained light after the Christmas holiday season. The dollar rose to a fresh two-year high of Y86.63 before slipping back to Y85.96, down 0.3 per cent on the day. Over the year, the yen has fallen 9.8 per cent against the dollar

The yen was also a little stronger against the euro, which fell 0.3 per cent to Y113.77. Over the year, the yen was down 12.6 per cent against the single currency. Sterling rose 0.1 per cent to Y139.02 on the day, and was up 14 per cent over the year.

The euro was weaker following recent gains as investors also bought dollars after news of the latest impasse in fiscal cliff talks, while caution deepened after Italy paid higher borrowing costs at its latest auction of five- and 10-year bonds. The euro fell 0.1 per cent to $1.3227 against the dollar, but was up 2.1 per cent on the year, having traded around the $1.20 level at the height of the eurozone woes in August.

Against the pound, the euro was down 0.4 per cent to £0.8185, and sterling remained 1.8 per cent up on the year. Sterling was up 0.4 per cent against the dollar on the day at $1.6158, and up 3.4 per cent on the year.

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