Dollar-Yen at 89? It Could Happen by Year-End

The dollar-yen, which has fallen almost 3 percent from a four and half year high in May and is barely hanging on to the 100 mark, is likely to hit 89 by the end of the year, according to one economist.

Clifford Bennett, chief economist at financial services firm White Crane Group, forecasts the dollar-yen to weaken about 11 percent from current levels until the end of 2013.

"The dollar-yen was the most overbought market of any market in the world last week and it has a lot of unwinding to do just to get back to neutral on some highly speculative positions," Bennett told CNBC Asia's "Squawk Box." "Remember where the dollar-yen is coming from. It has been on a huge rally and so down to 89 is really a volatile pullback."

The overall weakening of the U.S. dollar, better economic data from Japan, added to an investor pull back on shorting the yen are all going to lead to its strengthening despite the Japanese government's commitment to weaken the currency, according to Bennett.

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"I remember when the Japanese government was totally committed to the dollar-yen never falling below 100. I was shorting it there, selling directly to the BOJ [Bank of Japan] as it fell to 80. So governments don't always get to control their currencies," Bennett said.

Japanese Prime Minister Shinzo Abe is expected to fire his third salvo to improve the competitiveness of the world's third largest economy this week, after announcing fiscal stimulus earlier this year and pushing the Bank of Japan to adopt an aggressive monetary policy.

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Abe is expected to introduce more flexible labor policies and tackle deep-seated issues such as opening up the farm sector or loosening the country's tight immigration laws.

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Abe's policies thus far have led to the yen weakening more than 25 percent against the U.S. dollar since mid-November when he first began to talk of radical change.

Timothy Riddell, head of global markets research, Asia at ANZ, said it's unlikely that Japanese authorities will not follow through on structural reforms, which should support the yen to stay weak. He added that the Japanese authorities will like to see the yen in the 100s.

Bennett, however, argues that a weaker U.S. dollar, which he says peaked last week, will have a big hand in pushing the yen lower.

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"We are looking at synchronized global growth in the second half of the year. So we are going to have a boom in the second half of the year. What this means is increased confidence in the U.S. [which] paradoxically means selling of the U.S. dollar," Bennett said.

The U.S. dollar index hit a high of 84.36 last Tuesday, trading near its highest level in three years of 84.49 set on May 23.

— By's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu