Yen Falls as Prospect Global Slump Easing Reduces Refuge Demand

By Ron Harui

April 29 (Bloomberg) -- The yen fell for the first time in a week against the dollar and dropped versus the euro on speculation a U.S. report today will add to evidence the global economy may be recovering from recession.

Japan’s currency snapped an eight-day winning streak versus South Korea’s won after the Bank of Korea said the country’s current-account surplus surged to a record in March. The yen weakened for the first time in three days against New Zealand’s dollar after a government report showed the South Pacific nation’s exports rose more than economists expected in March.

“Any signs the pace of contraction in the U.S. economy is easing will probably bolster investor confidence,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “This is likely to reduce ‘safe-haven’ demand for the dollar and the yen.”

The yen declined to 127.55 per euro as of 11:01 a.m. in Singapore from 126.79 in New York yesterday. The currency fell to 96.93 against the dollar from 96.45. The euro traded at $1.3161 from $1.3149 yesterday in New York. Europe’s single currency dropped to 89.67 British pence from 89.86 pence.

Australia’s dollar rose to 68.93 yen from 68.10 yen and New Zealand’s dollar climbed to 54.57 yen from 53.90 yen yesterday in New York. Japan’s currency dropped to 13.88075 versus South Korea’s won from 14.06857.

Benchmark interest rates are 3 percent in New Zealand and Australia, compared with 0.1 percent in Japan and as low as zero percent in the U.S. attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

The volume of currency trading is likely to be less than normal because of a national holiday in Japan, said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney.

U.S. Economy, Fed

The Dollar Index was little changed. The U.S. economy probably contracted at an annual rate of 4.7 percent in the first quarter, after shrinking 6.3 percent in the final three months of 2008, according to a Bloomberg News survey. The Commerce Department releases the data at 8:30 a.m. in Washington.

The Federal Reserve will keep its target lending rate in a range of zero to 0.25 percent, a separate Bloomberg survey showed. Policy makers will announce their decisions on interest rates and goals for purchases of Treasuries and mortgage securities at 2:15 p.m. in Washington.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona was at 85.110 from 85.158 yesterday.

South Korea’s current-account surplus swelled to $6.65 billion last month, almost doubling from February, the central bank said today. New Zealand’s exports surged 17 percent in March from the previous month, the first back-to-back increase since 2007, the statistics bureau said.

‘Positive Territory’

The yen fell against the Australian and New Zealand dollars for the first time in three days as the MSCI Asia-Pacific excluding Japan Index gained 1.2 percent and Standard & Poor’s 500 Index futures rose 0.3 percent.

“Equity markets and stock futures are in positive territory,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd. “This is causing selling of the yen.”

The VIX Index, a measure of market volatility known as Wall Street’s “fear gauge,” declined 1 percent to 37.95 yesterday, indicating traders are becoming more confident about stock- market advances.

Gains in the euro may be limited on concern disagreement is deepening among European Central Bank officials on measures needed to combat the 16-nation region’s recession.

ECB Executive Board member Lorenzo Bini Smaghi yesterday devoted much of his speech to highlighting the difficulties for the central bank of buying assets, suggesting he shares Bundesbank President Axel Weber’s view.

ECB Officials

Weber has said he doesn’t favor cutting the benchmark rate below 1 percent and is against buying assets, while others such as Athanasios Orphanides of Cyprus don’t want to rule those options out. Fellow member Juergen Stark will speak today in Siegen, Germany, and Ewald Nowotny will speak in Vienna tomorrow.

“We’re getting somewhat confusing hints from the very large number of ECB members,” said Westpac’s Callow. “They have so many officials and they’re not speaking with one voice. We’re inclined to sell the euro on rallies.”

Investors maintained bets the ECB will cut its 1.25 percent target lending rate at its next meeting on May 7. The implied yield on the three-month Euribor interest-rate futures contract for June delivery was unchanged from yesterday at 1.280 percent.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

Last Updated: April 28, 2009 23:15 EDT