Yen Falls as Signs of Chinese, U.S. Recovery Pare Safety Demand

By Matthew Brown and Yasuhiko Seki

May 1 (Bloomberg) -- The yen fell to a two-week low against the euro as signs of recovery in manufacturing in China and the U.S. sapped demand for the Japanese currency as a refuge from global financial turmoil.

The dollar advanced against the yen after the U.S. and Canada committed money to Chrysler LLC, which filed for bankruptcy and will partner with Fiat SpA. Australia’s dollar rose for a ninth week against the greenback while the South African rand gained versus the yen, euro and U.S. dollar on speculation investors will buy higher-yielding assets.

“The yen is weakening on the basis that the world seems to be a better place and the yen is a funding currency,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., the world’s largest custodian of financial assets.

The euro rose 1.1 percent to 131.98 yen at 7:26 a.m. in New York, from 130.52 yesterday, and reached 132.35, the highest level since April 14. The yen declined 0.7 percent to 99.30 against the dollar, from 98.63. It touched 99.58, the weakest level since April 17. The euro appreciated 0.5 percent to $1.3289 from $1.3230.

The U.S. currency will likely rise to more than 100 yen next week, according to Mellor. The dollar was last above that level on April 14.

Australia’s currency climbed 1 percent to 73.26 U.S. cents and increased 1.7 percent to 72.76 yen after Asian stocks posted last month their biggest rally since 1998. South Africa’s rand strengthened 1.3 percent to 8.4195 against the dollar, while advancing for a fourth day against the yen, increasing 1.2 percent to 11.79.

‘Crucial Variable’

“There is no real evidence of repatriation from Japanese investors, and that is a crucial variable if you are going to formulate a more bullish view on the yen,” said Henrik Gullberg, a foreign-exchange strategist in London at Deutsche Bank AG, the world’s largest currency trader. “This is a gradual resumption of what will be an upward trend in most of the yen crosses.”

The Japanese currency will weaken to as much as 115 per dollar in the next three to six months, Gullberg said.

Higher interest rates in Australia and South Africa, compared with Japan and the U.S., attract investors to the nations’ assets. Benchmark interest rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 1.25 percent in the 16 nations using the euro, 3 percent in Australia and 8.5 percent in South Africa.

Carry Trades

In carry trades, investors get funds in a country with low borrowing costs and invest in the assets of another with higher rates. The risk is that market moves can erase those profits.

The U.S. currency weakened against 12 of its 16 most actively traded counterparts tracked by Bloomberg as the appeal of the greenback as a refuge waned.

The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell to 84.472 after Chrysler began yesterday a bankruptcy process designed to revive its business using small- car technology from Fiat SpA.

The dollar dropped as futures on the Dow Jones Industrial Average Index advanced 0.3 percent and the Dow Jones Stoxx 600 Index of European shares gained 1.5 percent.

“As we move into the second half of this year, most of the world’s major economies will see the start of a sustainable recovery, and that will spur some dollar weakness as the safe- haven bid comes to an end,” David Powell, a foreign-exchange strategist at Bank of America-Merrill Lynch, said in a Bloomberg Television interview.

U.S. Manufacturing

The Institute for Supply Management’s manufacturing index in the U.S. climbed for a fourth month to 38.4 in April, from 36.3 in the previous month, according to the median forecast of 66 economists surveyed by Bloomberg. A reading above 50 indicates expansion. The report is due at 10 a.m. in New York.

China’s Purchasing Manager’s Index increased to a seasonally adjusted 53.5 in April from 52.4 in March, the Federation of Logistics and Purchasing said today in Beijing. A reading above 50 indicates expansion.

Demand for the yen weakened after the Japanese government said prices excluding fresh food fell 0.1 percent in March from a year earlier after being unchanged in the previous month. The jobless rate rose to 4.8 percent from 4.4 percent, the statistics bureau said in Tokyo.

The Bank of Japan said yesterday the economy will shrink 3.1 percent this fiscal year and prices will tumble as the recession takes a toll on spending. The BOJ kept its benchmark interest rate unchanged in a unanimous decision.

Yen Last Month

Japan’s currency gained 0.5 percent in April against the euro and 0.3 percent versus the dollar. The U.S. currency increased 0.2 percent against the euro last month.

The yen’s losses were tempered by speculation investors will cut “short” positions on the currency before Japan enters the Golden Week holidays, said Yousuke Hosokawa, a senior currency dealer in Tokyo at Chuo Mitsui Trust and Banking Co., a unit of Japan’s seventh-largest publicly traded bank. A short trade is a bet that an asset’s value will decline. Japan’s financial markets will be shut from May 4 to May 6.

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: May 1, 2009 07:35 EDT