Dollar, Yen Rise as China Export Slump Spurs Demand for Safety

By Yasuhiko Seki and Ron Harui

March 11 (Bloomberg) -- The dollar and the yen gained after China’s government said exports plunged by a record last month, reviving demand for the two currencies as a refuge from the deepening global recession.

The U.S. and Japanese currencies strengthened versus those offering higher yields such as the Australian dollar after China’s customs bureau said the trade surplus narrowed to the least since February 2006. The euro fell for the first time in four days against the yen on speculation European Central Bank council member Erkki Liikanen will signal policy makers may cut interest rates further. South Korea’s won rose for a fourth day, the longest stretch this year.

“The sharp plunge in exports means China’s growth could slow, boding ill for the region’s economies,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank by assets. This is “sparking buying of the dollar and the yen.”

The dollar climbed to $1.2646 per euro as of 7:48 a.m. in London from $1.2682 late in New York yesterday. The yen advanced to 124.73 per euro from 125.13. The U.S. currency was little changed at 98.59 yen from 98.67 yen.

Australia’s dollar dropped to 64.19 U.S. cents from 64.59 cents late yesterday and New Zealand’s dollar declined to 50.06 cents from 50.33 cents.

China’s trade surplus narrowed to $4.8 billion in February, about an eighth of the amount in the previous month, the customs bureau said. Exports tumbled 25.7 percent from a year earlier and imports fell 24.1 percent.

‘Shocking’ Data

China’s data was “so shocking that it halted flows into currencies of resource-rich nations,” said Masahiro Sato, Tokyo-based deputy general manager of the treasury division at Mizuho Trust & Banking Co. “There had been optimism that China would come out of a global recession faster than any other country.”

Demand for the euro weakened on speculation ECB member Liikanen will signal in a speech today in Helsinki that the central bank still has scope to reduce its key rate from a record low of 1.5 percent. Policy makers are ready to cut rates to zero if necessary, ECB Executive Board member Lorenzo Bini Smaghi said, according to a report in the Boersen-Zeitung newspaper yesterday.

“The euro area’s economy is likely to keep deteriorating and interest rates are expected to fall further,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The euro will probably weaken” to $1.2610 today, he said.

Citigroup Outlook

Korea’s won had the biggest gain of the 16 most traded currencies versus the greenback after Citigroup Inc. Chief Executive Officer Vikram Pandit wrote in a memorandum the bank is having its best quarter since 2007, easing concern losses would prompt financial companies to hoard dollars.

Citigroup’s memo suggests some signs of “an easing of the credit crisis,” said Osamu Takashima, chief foreign-exchange analyst at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest financial group. “Such signs are positive for currencies of emerging markets.”

The MSCI Asia Pacific Index of shares advanced 2.5 percent, the biggest gain in six weeks, and Nikkei 225 Stock Average added 4.6 percent.

The won advanced 2.8 percent to 1,471 per dollar, according to Seoul Money Brokerage Services Ltd. The currency, which last week reached an 11-year low of 1,597, has jumped 5 percent in the past four days.

Dollar Index

The Dollar Index, which the ICE uses to track the greenback’s performance against the currencies of six major U.S. trading partners, was at 88.841 from 88.927 yesterday. The index climbed to 89.624 on March 4, the strongest since April 2006.

Foreign-exchange volatility, a measure of risk implied by option prices, was close to a four-month low, according to an index compiled by JPMorgan Chase & Co.

Options traders see currencies of the Group of Seven industrialized nations fluctuating by an annualized 17 percent in the next three months, compared with 27 percent on Oct. 24, which had been the most since the index started in 1992.

The pound fell for a fifth day against the dollar, the longest losing streak since December, after the National Institute for Economic and Social Research said the U.K. economy shrank the most in at least seven years.

Gross domestic product in Britain fell 1.8 percent in the three months to February from the previous quarter, the London- based institute said today. The contraction is the largest since January 2002 when the institute began releasing the data on a monthly basis.

“The financial system in the U.K is languishing and the economy there is in the doldrums,” Yousuke Hosokawa, senior foreign-exchange dealer at Chuo Mitsui Trust & Banking Co. in Tokyo. “People feel no merit of buying pound right now.”

The pound declined to $1.3745 from $1.3753 yesterday.

To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

Last Updated: March 11, 2009 03:58 EDT