Dollar, Yen Weaken as Optimism Over Recovery Spurs Yield Demand

By Yasuhiko Seki

June 11 (Bloomberg) -- The dollar and the yen declined against the euro as speculation the global recession is easing prompted investors to buy higher-yielding assets.

The New Zealand and Australian dollars gained the most of the 16 most-active currencies after New Zealand’s central bank left interest rates unchanged for the first time in a year and Australia reported a smaller-than-expected drop in jobs. The euro rose against the dollar on speculation European Central Bank officials will signal a reluctance to cut interest rates, maintaining the currency’s appeal.

“Capital flight from the dollar and the yen continues,” said Minoru Shioiri, a senior currency dealer in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest banking group. “The receding worries about the credit crunch and the recession also weaken the need for holding onto safe-haven currencies.”

The dollar dropped to $1.4041 per euro as of 7:30 a.m. in London from $1.3984 yesterday in New York. Japan’s currency dropped to 137.29 per euro from 137.21. It fell to 139.22 on June 5, the weakest since Oct. 15. The U.S. currency traded at 97.99 yen from 98.12 yen.

New Zealand’s dollar climbed 2.1 percent to 63.90 U.S. cents, and advanced 1.8 percent to 62.57 yen. Australia’s dollar rose 1 percent to 81.11 U.S. cents and gained 0.8 percent to 79.42 yen. The MSCI Asia Pacific index of regional shares gained 0.4 percent and the Nikkei 225 Stock Average Index rose above 10,000 for the first time since October.

Japanese Buyers 

Japanese investors bought 476.7 billion yen ($4.9 billion) more overseas bonds than they sold in the week ended June 6, according to data released today by the Ministry of Finance in Tokyo. They were also net purchasers of 148.6 billion yen in foreign equities.

“Investors in Japan are selling the yen to buy some higher-yielding currencies,” said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. “Carry trades will last for a while.” Carry trades involve buying higher-yielding assets funded with loans made in countries with lower borrowing costs, such as Japan.

The Federal Reserve said yesterday the U.S. recession may be slowing in almost half of its regions and the outlook at some companies is improving. Five of 12 Fed districts “noted that the downward trend is showing signs of moderating,” the Fed said in its Beige Book business survey.

‘Begin Growing’ 

The New Zealand dollar strengthened the most in almost two weeks versus the greenback after the central bank said the country’s worst recession in at least three decades may be nearing the end.
“We expect the New Zealand economy to begin growing again toward the end of this year, but the recovery is likely to be slow and fragile,” Reserve Bank Governor Alan Bollard said in a statement in Wellington. “It’s likely to be some time before monetary policy support can be withdrawn.”

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets.

U.S. retail sales probably increased in May for the first time in three months, according to the median forecast of economists surveyed by Bloomberg News. The Commerce Department will release the report today.

Australia Dollar 

The Australian dollar reached the highest level in eight months against the yen after the statistics bureau said the number of people employed in the nation fell 1,700 from April. The median estimate of analysts surveyed by Bloomberg News was for a 30,000 decline.

Australia’s currency also advanced after China said urban fixed-asset investment rose a better-than-expected 32.9 percent in May after the government announced a 4 trillion yuan ($585 billion) stimulus package.

 The euro rose against the dollar on speculation European Central Bank President Jean-Claude Trichet may signal in a speech in Sofia tomorrow that there is no need to cut interest rates further.

The current interest-rate level is “appropriate,” ECB Executive Board member Juergen Stark said June 8. ECB Governing Council member Axel Weber said yesterday central banks may have to raise interest rates before inflation risks materialize to prevent future crises.

‘Buy’ the Euro 

“The mere fact that the euro-zone still has a rate advantage over major counterparts is still offering a good reason for investors to buy into the euro,” said Masahide Tanaka, senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank.

The ECB has lagged the Federal Reserve and the Bank of England, which have cut their key rates close to zero and started buying government and corporate bonds to pump money into their economies. At 1 percent, the ECB’s benchmark rate is the highest among Group of Seven countries.

The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, dropped 0.6 percent to 79.846. The Russian central bank’s first deputy chairman, Alexei Ulyukayev, said yesterday in Moscow that the country may switch some of its reserves from Treasuries to IMF bonds.

The dollar fell 6.6 percent versus the euro in May, the biggest monthly drop this year, on speculation the quadrupling of the U.S. budget deficit and the Fed’s increase of the money supply will undermine the greenback.

Technical Analysis 

The euro may fall to 135.65 yen after it failed to break above so-called resistance at 138.33 yesterday, Citigroup Inc. said, citing trading patterns.

The 138.33 yen level is the 76.4 percent retracement of the June 5 high of 139.22 and the June 9 low of 135.70, based on a series of numbers known as the Fibonacci sequence, Citigroup said. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. A break above resistance or below support indicates a currency may move to the next level.

“A continued hold of that level as resistance would suggest a move lower towards the support level at 135.65,” Citigroup analysts Tom Fitzpatrick in New York and Shyam Devani in London, wrote in research yesterday. “We maintain that the days ahead will likely see a stronger Japanese yen.”