Yen Declines on Speculation Japan’s Business Confidence Slumped

By Theresa Barraclough and Ron Harui

March 31 (Bloomberg) -- The yen fell against the dollar, heading for its biggest quarterly loss since 2001, on concern a Bank of Japan report tomorrow will show business confidence slumped to a 30-year low.

Japan’s currency dropped the most in a week versus the euro on speculation a European Central Bank policy maker speaking today will signal the bank is likely to refrain from cutting interest rates further after it lowers them this week. The yen extended its first quarterly loss against the euro since June after a Japanese report showed the jobless rate jumped to a three-year high, damping demand for the currency.

“The Tankan is going to be terrible and it’ll be very yen negative as market participants won’t regard the yen as a safe haven any more,” said Toru Umemoto, a chief currency strategist based in Tokyo at Barclays Capital, a unit of the third-biggest U.K. bank.

The yen dropped to 98.29 per dollar as of 7:57 a.m. in London from 97.26 in New York yesterday. Japan’s currency fell to 130.19 per euro from 128.36 yesterday, when it touched 126.42, the strongest level since March 16. The dollar traded at $1.3245 per euro from $1.3199.

Japan’s currency has tumbled 7.8 percent against the greenback this quarter, the worst performance since the last three months of 2001, and has weakened 2.8 percent per euro.
Confidence among Japan’s large manufacturers dropped to minus 55 in March from minus 24 in December, according to a Bloomberg News survey of economists. That would be the lowest since 1975. The jobless rate climbed to 4.4 percent in February, from 4.1 percent the previous month, the statistics bureau said today in Tokyo.

Australia, New Zealand 

The yen declined the most against the Australian and New Zealand dollars among the 16 most-traded currencies on speculation investors sought higher returns in those countries. Japan’s currency fell 2.1 percent against the Australian dollar to 67.66 yen and declined 2.1 percent versus New Zealand’s dollar to 55.97.

“Asia set about on a huge buying spree of risk proxies, with the yen and the dollar stark underperformers,” Sue Trinh, senior currency strategist in Sydney at RBC Capital Markets, wrote in a note to clients today.
Japan’s benchmark interest rate is 0.1 percent, compared with 3.25 percent in Australia, 3 percent in New Zealand and 1.5 percent in Europe.

Volatility 

Implied volatility on one-month dollar-yen options fell to 18.5 percent from 19.2 percent yesterday, indicating a lesser risk of exchange-rate fluctuations that can undermine currency investments. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of option prices.

The euro rose for the first time in three days against the yen on speculation assets denominated in Europe’s currency will maintain their advantage over those in Japan even if the ECB cuts borrowing costs at their April 2 meeting.

ECB President Jean-Claude Trichet and his colleagues will lower their key rate to 1 percent from 1.5 percent, according to a Bloomberg survey. ECB council member Axel Weber this month said the central bank shouldn’t cut borrowing costs below one percent. Governing Council member Miguel Angel Fernandez Ordonez speaks at 10 a.m. today in Madrid.

“The ECB will continue to be reluctant to cut rates or to move to quantitative easing,” said Satoru Ogasawara, a foreign- exchange analyst and economist in Tokyo at Credit Suisse Group AG, the second-largest Swiss bank. “The monetary-policy differentials make the euro better supported.” 

Dollar Losses 

Losses in the dollar may be tempered on speculation the U.S. government’s efforts to stem the nation’s financial crisis will help the world’s biggest economy recover.

The Dollar Index headed for a fourth quarterly gain, the longest stretch since 2005, after President Barack Obama yesterday gave General Motors Corp. 60 days to develop a new strategy and provided Chrysler LLC with 30 days to complete a partnership with Italy’s Fiat SpA. Obama also told the companies to “fundamentally restructure” or lose government aid.

“The U.S. is acting decisively and quickly to resolve the carmakers’ problems, which would be good for the overall economy,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-largest lender. “This is positive for the dollar.” 

Federal Reserve Governor Elizabeth Duke said in Charlotte, North Carolina yesterday the central bank is “committed to employing all available tools to promote economic recovery and to preserve price stability.”
The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, declined to 85.530 from 85.869 yesterday, when it reached 86.125, the highest level since March 18.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
Last Updated: March 31, 2009 03:01 EDT