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Forex pairs in this Article » (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the traditional safe haven currencies of the Yen and US dollar have continued to weaken in the Asian trading session, extending their weakening trends which have been evident in early 2013.

He feels that the under performance of safe haven currencies reflects the ongoing improvement in investor risk sentiment driven by reduced downside risks to global growth and loosening global liquidity which is encouraging risk seeking behaviour amongst investors. He adds that the efforts of central banks to encourage investors to rotate portfolios into riskier assets in an attempt to support economic recovery is gaining more traction as evident by the latest weekly report from the EPFR, the funds research company.

The report revealed that in the week to the 9th January, net inflows into equity funds totalled USD 22.2bln, which was the highest weekly amount since September 2007 and the second highest reading since records began in 1996. According to the FT, record inflows into emerging markets and world funds drove much of the expansion.

He sees that the recent pick up in capital outflows from the US is beginning to result in the Fed's current open-ended quantitative easing programme weighing more heavily upon the US dollar. The Fed's balance sheet has increased by around USD125 billion between mid-September 2012 and the 9th January 2013 yet the dollar index has remained relatively stable.

Hardman feels that the risk going forward if investor risk sentiment continues to improve while the Fed's balance sheet begins to expand by USD85.0 billion per month in 2013 is that the dollar gradually displays some modest weakness ahead. The US dollar's resilience to the Fed's loose monetary policy stance in 2012 was supported by more subdued capital outflows from the US. This was evident in the latest TIC report which revealed that US investors were net sellers of foreign securities cumulatively totalling USD34.6 billion in the twelve months to October 2012.

He feels that the near-term risk to the risk asset rally is that it already a well established trend which may begin to exhibit signs of exhaustion followed a corrective period heading into February when uncertainty regarding resolving the US debt ceiling is likely to intensify. Recent weakness has proved much more material for the yen than the US dollar as investor unease over BoJ monetary policy has helped trigger the unwind of yen over valuation. In contrast the US dollar is already weak helping to limit further downside potential.

Looking back to Japan, Hardman finishes by noting that "Yen weakness has also been reinforced over the weekend by comments from PM Abe reiterating that he'll seek a bold policy leader to head the BoJ. A Yomiuri newspaper poll revealed that the new government's approach is proving popular amongst the public with cabinet support rising to 68%, while 66% of respondents supported the strengthening of cooperation between the government and BoJ."
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