Yen Rises on Concern Swine Flu Spreading, U.S. Slump Deepening

By Matthew Brown and Yasuhiko Seki

April 27 (Bloomberg) -- The yen rose to a four-week high against the dollar as the spread of swine flu boosted demand for the currency as a refuge and White House adviser Lawrence Summers said the economy will keep shrinking “for some time.”

The Mexican peso led declines in high-yielding currencies after more than 80 people died of swine flu in the country and cases were confirmed in the U.S. and Canada. The euro fell the most in a week against the dollar and the yen after the Liberation reported that Societe Generale SA, France’s third- largest bank, may post a loss after risky investments by its alternative asset-management unit.

“The combination of the French banks moving lower and airline stocks falling on fears of the consequences of a pandemic is really giving traders little choice but to bid the yen back up on the risk aversion, followed closely by the dollar,” said Ashraf Laidi, chief market strategist in London at CMC Markets.

The yen strengthened to 96.74 per dollar as of 8:58 a.m. in London from 97.17 last week in New York. It rose as high as 96.53, the highest level since March 30. Japan’s currency appreciated to 127.31 per euro from 128.66. The dollar climbed to $1.3170 per euro from $1.3242.

The Mexican peso declined 2.2 percent to 13.6402 per dollar, the Australian dollar fell 1.5 percent to 71.25 U.S. cents, and the New Zealand currency dropped 1.6 percent to 56.34 U.S. cents.

The yen may strengthen to 94 per dollar by the end of the month and 92 the end of May, Laidi said.

‘Sharp Declines’

The U.S. economy will experience “sharp declines in employment for quite some time this year,” Summers, director of the White House National Economic Council, said yesterday on “Fox News Sunday.”

His comments came before a U.S. report in two days that economists say will show the world’s largest economy contracted 4.7 percent in the first quarter, after shrinking 6.3 percent in the final three months of 2008.

Societe Generale may post a loss of between 5 billion euros and 10 billion euros after risky investments by its alternative asset-management unit, Liberation said. The bank denied the report, adding in a statement that net income in 2008 was 2 billion euros.

The Mexican peso weakened for a second day against the dollar after U.S. President Barack Obama’s administration declared a public health emergency and released stockpiles of medicine because of a growing number of swine flu cases.

Bars Closed

Mexico requested the closure of bars, movie theaters and churches in the capital to fight swine flu. Foreign tourism brought $13.3 billion into the economy last year, making it the country’s third-largest source of foreign currency behind oil exports and remittances from nationals living abroad. Private consumption accounts for about 50 percent of total demand for goods and services in the economy.

“The outbreak of swine flu sparked concerns about geopolitical risk and enhanced risk aversion,” said Kenichi Yumoto , head of foreign-exchange sales in Tokyo at Societe Generale. “This led to buying of the yen.”

The euro declined for the first time in five days against the dollar as European shares slipped. The European Central Bank will announce whether it intends to take additional measures to push down borrowing costs when policymakers meet next week.

ECB President Jean-Claude Trichet may suggest he will lower rates further when he speaks today at a conference on trends in global finance at the New York Federal Reserve Bank. Vitor Constancio, a member of the ECB governing council, will speak at a conference today on corporate governance and consumer interest in Lisbon.

Below 1 Percent

ECB council member Nout Wellink said the bank should consider lowering the benchmark rate below 1 percent, Market News International reported yesterday, citing an interview. “This is part of a discussion we should have in the governing council,” Wellink said in Washington, according to the news agency. “Of course that should be discussed.”

Investors in the past week raised bets the ECB will reduce its 1.25 percent target lending rate at its May 7 meeting. The implied yield on the three-month Euribor interest-rate futures contract for June delivery fell to 1.285 percent from 1.325 percent a week ago.

Investors bullish on the U.S. economy say the dollar will strengthen as America recovers first from the global economic recession. Those who expect the longest contraction since the early 1980s to continue say the currency should appreciate as the haven from turmoil in world markets. Foreign investors bought a net $22 billion of U.S. financial assets in February, the Treasury Department said April 15.

Foreign Demand

“The equity-flow data have been dollar supportive almost any way you look at it,” said Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC, which has $11.3 trillion in assets under custody. When people flood into the equity market they’ve been buying the dollar as well.”

So far, the data show undiminished foreign demand for U.S. financial assets. Net purchases totaled $22 billion in February as China and Japan added to their holdings of U.S. government debt, the Treasury said. The Fed’s holdings of Treasuries on behalf of foreign central banks and other institutions rose 8.7 percent this year to $1.84 trillion.

More foreign money flowed into U.S. stock markets in the 20 business days ended April 15 than in 69 percent of the other 20- day periods going back to 1997, according to State Street data. The five-day flow was in the 77.6 percentile, compared with outflows in the last six months that were higher than 86.4 percent of past periods, the data showed.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

Last Updated: April 27, 2009 04:17 EDT