Yen Drops as Speculation Global Slump Waning Spurs Yield Demand

By Bo Nielsen and Ron Harui

May 4 (Bloomberg) -- The yen fell for a fifth day against the euro, its longest losing streak in six weeks, and slid to a six-month low against Australia’s dollar as signs the recession is easing spurred investors to buy higher-yielding assets.

The dollar approached a three-week low against the euro before a U.S. report tomorrow that may show business at service providers, which account for almost 90 percent of the world’s largest economy, is starting to improve. The yen fell against all of the 16 most-traded currencies after China’s manufacturing expanded for the first time in nine months.


“It’s difficult to be optimistic for the yen at a time when risk aversion is declining,” said Michael Klawitter, a currency strategist with Dresdner Kleinwort in Frankfurt. “Downward momentum in the economy seems to be slowing.”

The yen weakened to 132.38 per euro at 8:53 a.m. in London from 131.54 in New York on May 1, after earlier trading at 132.88, the lowest level since April 14. Japan’s currency weakened to 99.49 per dollar from 99.11.

The dollar depreciated to $1.3305 per euro from $1.3273 in New York on May 1. It reached $1.3386 on April 30, the lowest level since April 13. The yen will weaken beyond 100 per dollar and to about 134.5 per euro this week, Klawitter said.

The Institute for Supply Management’s index of non- manufacturing businesses probably climbed to 42 in April, according to a Bloomberg survey of economists. Readings below 50 signal contraction. The Tempe, Arizona-based group will release the figures tomorrow.

‘Put on Risk’ 

“The market wants to put some of the risk trade on that they took off toward the end of last week,” said Greg Gibbs, a currency strategist at RBS Group Australia Ltd. in Sydney. “The market is seeing confidence in the global recovery and hence the dollar is trending lower.”

The yen declined 1 percent to 73.11 per Australia’s dollar, touching 73.56, the weakest since Oct. 14. It fell 1 percent to 57.13 against New Zealand’s dollar. The volume of currency trading is likely to be less than normal because of Japan’s “Golden Week” holidays from today to May 6, Gibbs said.

The yen dropped as Asian equities and U.S. stock futures rose. The MSCI Asia-Pacific Index of regional shares climbed 2.3 percent and the Standard & Poor’s 500 Index futures advanced 0.4 percent.
“The markets are aware that as long as U.S. stocks hold up, it can manifest risk-taking trades via strategies such as carry trades or outright long positions on emerging-market currencies,” wrote Philip Wee, senior currency economist at DBS Group Holdings Inc. in Singapore, in a research note.

Rupiah, Won 

Indonesia’s rupiah advanced 1.1 percent to 10,495 per dollar and South Korea’s won rose 0.5 percent to 1,277.30.
Benchmark interest rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 3 percent in Australia and 2.5 percent in New Zealand.

That attracts investors to carry-trade strategies in which they borrow funds in countries with lower interest costs, such as Japan, and buy assets in nations with higher rates, allowing them to pocket the difference.
Futures traders pared bets the yen will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 4,579 on April 28, compared with net shorts of 13,695 a week earlier. The figures are sometimes used as a reverse indicator.

Signs of Recovery 

The yen also fell as the CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 50.1 in April from 44.8 in March, the investment bank said today in an e-mailed statement. A reading above 50 indicates an expansion.

The rebound in manufacturing adds to signs of recovery in the world’s third-biggest economy as China grapples with a collapse in world trade and a slowdown in property investment and construction.
Losses in the dollar may be tempered before the Federal Reserve and U.S. banking regulators reveal the results from stress tests on the nation’s 19 biggest banks this week.

The government’s announcement, delayed by three days to May 7, will disclose both aggregate information about the capital buffer required to absorb losses if the recession worsens and firm-specific details, a government official said on condition of anonymity. Regulators will make the announcement after financial markets close, the person said.

‘Downside Risks’ 

“The results of the U.S. banks’ stress tests may pose downside risks for the markets,” said Joseph Capurso, a foreign-exchange strategist at Commonwealth Bank of Australia in Sydney. “As such, the dollar may garner support as a ‘safe- haven’ currency.”

The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, declined to 84.376 from 84.546 on May 1.

The euro rose even as Germany’s Federal Statistics Office in Wiesbaden said today that retail sales, adjusted for inflation and seasonal swings, unexpectedly fell 1 percent in March from February. Economists surveyed by Bloomberg had forecast a gain of 0.2 percent.

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: May 4, 2009 04:01 EDT