TOKYO (Reuters) - The dollar's bounce from a 2-1/2-year low against the yen last week gives the U.S. currency at least some temporary respite on the charts, but a fall towards 105 yen and even 100 seems probable next year.
By Eric Burroughs - Analysis
TOKYO (Reuters) - The dollar's bounce from a 2-1/2-year low against the yen last week gives the U.S. currency at least some temporary respite on the charts, but a fall towards 105 yen and even 100 seems probable next year.
The dollar's jump to a high of 111.23 last Friday created what's called a bullish engulfing pattern on a weekly basis that helps provide a base of support, giving it scope to climb towards 112.00 in the near term.
The dollar narrowly avoided a more negative technical shadow by managing to hold above 110 yen at November's monthly close, which would have been the first monthly close below that level since May 2005.
!ADVERTISEMENT!But technical analysts say a further slide is likely given the violent break of its steady uptrend since 2005 and the fact that some other pairs, especially sterling/yen, have formed clear patterns suggesting a medium-term drop is in store.
A dollar rise above 115 yen is needed to break the downtrend and make a push towards this year's peak of 124.14 seen in June, analysts say, but such a shift is unlikely to happen.
"Given this big downturn in the dollar is due to concerns over the U.S. subprime mortgage crisis and credit-related losses at financial institutions, the dollar is highly unlikely to rise above that level and reverse its current trend," said Kengo Suzuki, a currency strategist at Shinko Securities.
Suzuki said there was a 95 percent chance the dollar could fall towards 101.50 yen next year -- a level near which the Japanese authorities have repeatedly intervened in the past to prevent any yen appreciation back into double-digit territory.
On Wednesday the dollar changed hands near 110.30 yen <JPY=>, holding off a 2-1/2-year low of 107.22 struck last week.
105 ON THE HORIZON
The 105 yen level is key because it marks an important zone where the dollar has bottomed in the past few years, especially in late 2003 and 2004, when the Japanese authorities intervened massively to prevent yen gains towards the 100 line.
Japan's Ministry of Finance spent about $140 billion buying dollars in the first quarter of 2004 alone, when the dollar fell as low as 103.40 yen.
Looking back over the past decade or so, the two major levels for the dollar remain the record low of 79.70 yen in 1995, from which it soared all the way up to 147.60 in 1998.
Since that 1998 peak -- when the Russian debt default and near-collapse of hedge fund giant LTCM sparked a massive unwinding of carry trades -- the dollar has not fallen under 101 yen. The lowest it has got was near 101.25 yen in late 1999.
A fall through 105 would target those 101 lows and possibly pave the way for a tumble back into double-digit territory for the first time since 1995.
Nicole Elliott, a technical strategist at Mizuho Corporate Bank in London, favors a fall towards 105 yen and notes that the dollar could be about to experience the rarity of back-to-back quarterly falls, depending on how December plays out.
Elliott reckoned the performance of Asian and some European currencies against the yen suggested the Japanese currency was ready for a bigger rise, saying sterling/yen's <GBPJPY=R> large head-and-shoulders this year indicated a "major topping pattern."
Other chart-watchers have said dollar/yen is converging within a broad sideways triangle pattern between the 1995 low and 1998 high.
How that triangle is broken will determine the medium-term direction.
Last week's 107.22 low took the dollar right near the bottom end of that triangle -- the upward trendline from the 1995 low that also touches the January 2005 trough.
The upper end of that triangle drawn off the 1998 high and this year's peak is now near 122.60.
David Solin, a partner at Foreign Exchange Analytics, said there was a risk of the dollar trading back towards the top of that triangle. The next few weeks would be a period of consolidation to determine the importance of the 107/108 low, he said in a note to clients.
Suzuki at Shinko Securities also says 108 is important when looking at a histogram that gauges how often the dollar finished within one yen intervals at the New York close between January 2000 and early November this year.
"The histogram, too, tells the 108 yen level is a psychologically important level for the dollar," Suzuki said.
(Additional reporting by Rika Otsuka; Editing by Alan Raybould)
