Euro Advances as Stock Gains Increase Demand for Higher Yields

By Yasuhiko Seki and Ron Harui

April 30 (Bloomberg) -- The euro rose for a third day against the dollar and the yen on speculation gains in Asian stocks will spur demand for higher-yielding assets.

The yen advanced against the dollar after the Wall Street Journal reported Chrysler LLC’s talks to avoid bankruptcy have broken down, damping demand for the U.S. currency. South Korea’s won climbed to a four-month high and the Taiwan dollar jumped the most in nine years as equity gains bolstered demand for emerging-market assets. New Zealand’s dollar declined against the yen after the central bank reduced borrowing costs to a record low and said they will stay low for some time.

“Expectations that the recession in the U.S. and other nations will ease are improving risk-taking appetite,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “So, shares are surging and the yen and the dollar are weakening” against higher-yielding currencies, he said.

The euro climbed to $1.3363 as of 7:45 a.m. in London from $1.3271 in New York yesterday. The 16-nation currency rose to 130.07 yen from 129.61, after touching 130.25, the highest level since April 17. The yen strengthened to 97.34 versus the dollar from 97.66. The yen has gained 1.7 percent against the greenback this month and 0.8 percent versus the euro.

Demand for the safety of the dollar weakened as Asian stocks extended their monthly gain. Japan’s Nikkei 225 Stock Average advanced 3.9 percent and the MSCI Asia-Pacific Index of regional shares rose 3.6 percent. The MSCI World index has risen 10.8 percent this month, the most since 1989, according to data compiled by Bloomberg.

‘Risky Currencies’

“Risky currencies may well catch a bid in the coming days, to the detriment of ‘safe-haven’ currencies such as the dollar and yen,” wrote analysts led by Callum Henderson, Singapore- based global head of currency research at Standard Chartered Bank, in a research note today.

The won advanced 4.5 percent to 1,282.95 per dollar, after touching 1,280.81, the strongest since Jan. 2, according to data compiled by Bloomberg. The currency has strengthened 7.8 percent this month. Taiwan’s dollar gained 1.7 percent to NT$33.150, the biggest gain since January 2000.

Japan’s currency extended its first monthly advance versus the dollar since January on speculation Chrysler and General Motors Corp. will file for insolvency, deepening the global financial crisis.

The Obama administration’s auto task force had been working to convince hedge funds and other creditors to accept terms to cut the automaker’s debt, the WSJ report said, citing people involved with the talks.

‘Dismal News’

“We have a plethora of dismal news including a possible collapse of Chrysler,” said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s third- largest banking group. “This will support the yen as a refuge from the global gloom.”

President Barack Obama earlier said he is “hopeful” Chrysler will be able to finish its negotiations with debt holders and become a viable and competitive automaker paired with Italy’s Fiat SpA, people familiar with the situation said.

“If Chrysler is torn up and cut to bits and pieces, the dollar may face even stronger selling,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. Still, “if the company can maintain the bulk of its operation and secure most jobs in the end, the dollar-selling may turn out to be a blip.”

Swine Flu

The yen also rose versus the greenback on speculation the outbreak of swine flu will keep spreading and after the World Health Organization warned the first influenza pandemic since 1968 is “imminent.”

Mexico, where the death toll from the disease is highest, said 159 people may have died. The WHO said there have been seven confirmed deaths in the nation from the disease. Egypt ordered the immediate slaughter of the country’s pigs, numbering as many as 400,000, said a spokesman for the country’s mission to the United Nations.

“The spread of swine flu may temporarily paralyze economic activity internationally and derail any recovery,” said Tatsushi Shikano, a senior economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest banking group. “For Japan, this tragedy may slash economic growth.”

Shrinking Economy

The Bank of Japan said the economy will shrink 3.1 percent this fiscal year and prices will tumble as the recession takes a toll on spending. The central bank cut its forecast from a 2 percent contraction predicted three months ago, according to its semiannual outlook released today in Tokyo.

The economy will contract 4.2 percent in the year to March 2010, more than twice the pace the central bank projected three months ago, according to economists surveyed by Bloomberg News. Governor Masaaki Shirakawa left the overnight lending rate at 0.1 percent today.

New Zealand’s dollar fell against the yen after the central bank cut borrowing costs to a record low and said the benchmark will stay low until late 2010, reducing the appeal of the nation’s assets.

Reserve Bank Governor Alan Bollard reduced the overnight cash rate by half a percentage point to 2.5 percent. He has lowered borrowing costs by 5.75 percentage points since July to counter the nation’s worst recession in more than three decades. Rates may go lower and will stay down “until the latter part of 2010,” Bollard said.

This was “a huge reaction on a huge statement,” said Imre Speizer, a market strategist in Wellington at Westpac Banking Corp. “The yield support for the kiwi has evaporated even more after today, which should be a medium-term drag.”

New Zealand’s dollar declined to 55.88 yen from 55.98 yen.

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

Last Updated: April 30, 2009 02:51 EDT