Yen Falls Against Dollar on Shrinking Economy; Stocks Advance

By Bo Nielsen and Ron Harui

March 4 (Bloomberg) -- The yen weakened to more than 99 per dollar for the first time in almost four months as stock markets rose across Asia and Europe, reducing the allure of currency as a refuge from the financial turmoil.

The yen also declined against the euro after a government report showed Australia’s economy unexpectedly shrank last quarter, fueling concern that the slowdown across Asia will worsen. The euro fell to the lowest level in more than three months versus the dollar before a meeting tomorrow at which the European Central Bank may cut its benchmark interest rate to a record low 1.5 percent.

“The yen is suffering from a marginal recovery in risk aversion and as the market increasingly focus on the dramatic slowdown in Japan,” said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp.

The yen lost 1.1 percent to 99.24 per dollar as of 9:01 a.m. in London from 98.16 in New York yesterday, and traded at 99.36, its weakest since Nov. 10. The dollar climbed to $1.2516 per euro, from $1.2561 yesterday, and reached $1.2457, the highest since Nov. 21.

The yen declined to 124.15 per euro from 123.31. Australia’s dollar dropped to 63.60 U.S. cents, from 63.78 cents yesterday. It touched 62.87 cents, the lowest level since Feb. 2.

‘Sobering’ GDP

Australia’s gross domestic product contracted 0.5 percent from the previous three months, the Bureau of Statistics said in Sydney, compared with economists’ estimates for 0.2 percent growth. The GDP figures are “sobering,” Treasurer Wayne Swan said in Canberra after the data was released. The central bank kept the benchmark interest rate at 3.25 percent yesterday, after cutting it by four percentage points since September.

Japan’s economy will shrink 4 percent in the year starting April 1, faster than this year’s projected decline of 2.9 percent, according to the median estimate of 15 economists surveyed by Bloomberg last month. It contracted an annual 12.7 percent in the fourth quarter, a report showed on Feb. 16.

The MSCI World Index of shares rose 0.2 percent, the second gain in 17 days. Futures on the Standard & Poor’s 500 Index advanced 1.5 percent. Investors tend to sell the yen to seek higher yields when stock markets rise, Derrick said.

The U.S. currency advanced for a fourth day against the euro on speculation Dallas Federal Reserve President Richard Fisher and Atlanta Fed President Dennis Lockhart will stress today the need to increase financial assistance to the banking system.

‘Fragile’ Sign

“The dollar’s strength is a sign of how fragile the sentiment is in the markets today,” said Paul Robson, a currency strategist in London at the Royal Bank of Scotland Group Plc. The euro will fall to $1.235 before the release of the U.S. non-farm payrolls report on March 6, Robson said.

Fed Chairman Ben S. Bernanke said yesterday in testimony prepared for the Senate Budget Committee that policy makers may have to expand aid to banks beyond the $700 billion already approved and take other measures even at the cost of soaring fiscal deficits.

The Dollar Index, which the ICE uses to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, rose 0.5 percent to 89.376.

“Bernanke is telling the public that the Fed and the government will act to support the banking system, which is a support for the U.S. dollar,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, a unit of France’s Credit Agricole SA. “Stronger initiatives by the U.S. will be the driving force of currency markets.”

Fisher speaks at 8 a.m. in Fort Worth, Texas, and Lockhart speaks at noon in Miami.

Euro Declines

The euro fell after a report showed Europe’s services industries contracted at a record pace in February, pushing the economy deeper into its worst recession in more than a decade.

The ECB will cut the benchmark refinancing rate by 50 basis points to a record 1.5 percent tomorrow, the lowest since the 16- member currency was introduced in 1999, according to the median estimate of 55 analysts in a Bloomberg survey.

The euro was also weighed down by concern eastern European countries may default on their debt, reducing investor demand for the 16-nation currency, according to Standard Chartered Bank. Hungary this week had its outlook cut to “negative” by Fitch and Standard & Poor’s lowered the credit ratings of Ukraine and Latvia last week.

“Emerging Europe’s crisis poses clear and present dangers to the euro zone,” Manik Narain, an emerging-markets currency strategist in London at Standard Chartered, wrote in a research note today. “We expect emerging European currencies to remain under pressure over the next six months.”

Zloty, Forint

The Polish zloty was little changed at $3.7959 against the dollar. The Hungarian forint declined 0.4 percent to 245.79.

The yen fell for a second day versus the dollar after the aide to Ichiro Ozawa, head of the Democratic Party of Japan, was arrested on suspicion of receiving illegal political donations from a construction company, local media reported yesterday. “I did absolutely nothing illegal,” Ozawa told reporters today in Tokyo, vowing to stay on as leader.

“There is still instability in Japanese politics,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG. “This may increase foreign investors’ negative perception of Japan. The yen is likely to be sold” to 98.70 against the dollar and 124 per euro today, he said.

Japan’s currency had its worst month in February since 1995 after a government report showed the economy shrank the most since 1974 last quarter and Finance Minister Shoichi Nakagawa quit amid accusations he was drunk at a press conference, eroding confidence in the government.

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

Last Updated: March 4, 2009 04:37 EST