Yen Falls, Heads for Quarterly Drop on Concern Slump Deepening

By Oliver Biggadike and Anchalee Worrachate

March 31 (Bloomberg) -- The yen fell against the dollar, heading for its biggest quarterly loss since 2001, after Japan’s Prime Minister Taro Aso said the world’s second-largest economy is still in a state of crisis.

The Japanese and U.S. currencies dropped against major counterparts today as stocks rose, reducing demand for safety. Chile’s peso was the world’s best performer against the dollar in the first quarter among 171 currencies tracked by Bloomberg as the government tapped foreign savings and cut interest rates to spur economic growth.

“We’re seeing a tentative return of risk appetite,” said Samarjit Shankar, a strategist in Boston at Bank of New York Mellon, which administers more than $20 trillion. “We’re also seeing Japanese investors themselves venturing outside the country because there’s not much yield or promise of return in Japanese assets.” 

The yen dropped 1.1 percent to 98.32 per dollar at 10:13 a.m. in New York, from 97.26 yesterday. Japan’s currency lost 1.8 percent to 130.72 per euro from 128.36 yesterday, when it touched 126.42, the strongest level since March 16. The dollar weakened 0.7 percent to $1.3294 per euro from $1.3199.

The pound climbed 0.3 percent to $1.4311 after a report showed confidence among U.K. consumers increased to the highest level since May. The British currency depreciated 0.6 percent to 93.04 pence per euro, paring its quarterly gain to 2.7 percent, the first advance since June.

‘We Like Sterling’ 

“We like sterling now that the pace of deterioration in the U.K. may be starting to stabilize,” said David Woo, head of currency strategy in London at Barclays Capital. “There are compelling reasons to believe sterling may be starting to find the bottom against the euro.” 

Chile’s peso advanced 0.2 percent to 582.65 per dollar, extending its quarterly gain to 9.8 percent, the best performance in the world and the first increase in a year. Policy makers cut the target lending rate to 2.25 percent, the lowest since December 2004. The government is selling $3 billion in the currency market, helping to buoy the peso.

Japan’s currency tumbled 8 percent against the dollar this quarter, the worst performance since the last three months of 2001, and weakened 3.5 percent versus the euro, the first quarterly drop since June.

Aso, Japan’s third prime minister in eighteen months, said his government will compile another economic aid package as a report showed unemployment at a three-year high and falling wages. Confidence among Japan’s large manufacturers dropped to minus 55 in the first quarter from minus 24 in the previous quarter, according to a Bloomberg News survey of economists before tomorrow’s Tankan report from the Bank of Japan.

Credit Default Swaps 

Credit-default swaps on Japan’s debt climbed 7 basis points, or 0.07 percentage point, to 91 basis points, the highest in a week, according to prices from CMA Datavision in New York. The contracts, used to hedge against losses on government bonds, rise as perceptions of credit quality deteriorate.

The Australian and New Zealand dollars rose against the yen and dollar on speculation the rally in stocks encouraged investors to seek higher returns. The yen lost 2.8 percent to 68.19 against the Australian dollar and 2.6 percent to 56.24 versus New Zealand’s dollar.

“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 the 16-nation euro area.

ECB Meeting 

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 its April 2 meeting.

ECB President Jean-Claude Trichet and his colleagues will lower the main refinancing rate by a half-percentage point to 1 percent, according to a Bloomberg survey. ECB council member Axel Weber has said the central bank shouldn’t cut borrowing costs below that level.

“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.”

Some analysts said 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 government and the Federal Reserve committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to ease the recession.

Dollar Index 

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.”

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 0.7 percent to 85.26, It reached 86.13 yesterday, the highest level since March 18.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net
Last Updated: March 31, 2009 10:22 EDT