Yen Climbs to Six-Week High as Stocks Fall on Recession Concern

By Anchalee Worrachate and Yasuhiko Seki

July 8 (Bloomberg) -- The yen rose to a six-week high against the euro and the dollar as stocks fell and Japanese machinery orders unexpectedly declined, stoking demand for the currency as a refuge from the economic turmoil.

The yen climbed against all 16 of the most-traded currencies for a second day on speculation the worldwide slump will sap corporate profit as earnings season gets under way. The dollar fell for a third day against the Japanese currency on concern the greenback’s role as the world’s reserve currency will be questioned at a Group of Eight meeting starting today.

“Money is gradually being pulled out of risk assets and that benefits the yen,” said Geoffrey Yu, a currency strategist in London at UBS AG, the world’s second-largest foreign-exchange trader. “People have been hoping that the world will become a better place after the crisis, and now reality is catching up.”

The yen strengthened to 131.40 per euro as of 7 a.m. in New York, from 132.13 yesterday. It earlier climbed to 130.42, the strongest since May 21. Japan’s currency advanced to 94.39 per dollar, after reaching 94.08, the highest since May 22. The euro was little changed against the dollar at $1.3925.

The MSCI World Index of stocks slid 0.5 percent and Europe’s Dow Jones Stoxx 600 Index declined 0.3 percent.

Investors typically buy the yen as a haven for their cash because Japan’s current-account surplus reduces the country’s dependence on borrowing abroad. The yen has strengthened more than four times as much as any of the 16 most-traded currencies versus the dollar in the past month, according to data compiled by Bloomberg.

Machine Orders

The yen rose for a fifth day against the euro, the longest stretch in five months, after a Japanese government report showed machinery orders declined for a third month in May. Orders, an indicator of capital investment in the next three to six months, fell 3 percent from April, following a 5.4 percent drop the previous month. Economists expected a 2 percent gain, according to a Bloomberg News survey.

A separate Japanese report showed the current-account surplus narrowed for a fourth month, adding to signs the global economy will take time to recover. The surplus shrank 34.3 percent in May from a year earlier to 1.302 trillion yen ($13.7 billion), the Ministry of Finance said in Tokyo.

“The market showed a knee-jerk reaction to the poor data and bought the yen as a safe-haven from the global gloom,” said Mizuho Shimozono, a Tokyo-based economist at Mizuho Research Institute Ltd., a unit of Japan’s second-largest banking group.

Japan’s currency typically strengthens during times of financial turmoil as the nation’s trade surplus means the nation does not have to rely on overseas lenders.

G-8 Meeting

The dollar fell against the yen as G-8 leaders gathered for their meeting, which starts today in L’Aquila, Italy.

Russia and India said in the past week the world economy is too dependent on the dollar and called for revisions to how $6.5 trillion in currency reserves are managed. “The dollar system or the system based on the dollar and euro have shown that they are flawed,” Russian President Dmitry Medvedev said in an interview with the Italian newspaper Corriere della Sera, repeating his proposal for a new reserve currency.

“There is a possibility that international policy makers will make negative remarks about the dollar,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This may make people reluctant to buy the dollar.”

The Dollar Index, up 0.6 percent since the end of last month, was little changed at 80.641 today. The index is used by the ICE to track the dollar against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc.

Sterling Declines

The yen also rose on concern that second-quarter earnings reports will show the first global recession since World War II isn’t abating. Alcoa Inc. starts the U.S. earnings season today as the first company in the Dow average to report results.

Analysts estimate profits fell an average 34 percent at S&P 500 companies in the second quarter and will drop 21 percent from July through September after plunging about 60 percent in the first three months, according to data compiled by Bloomberg.

The pound declined for a fifth day versus the dollar, trading as low as $1.6048, on speculation the Bank of England will increase its asset-purchase program at a monetary-policy committee meeting tomorrow, boosting the supply of the U.K. currency.

The central bank should extend this program to the full 150 billion pounds ($241 billion) authorized by the Chancellor of the Exchequer Alistair Darling and it should seek permission to spend even more, the British Chambers of Commerce said yesterday.

Expand Purchases

“There is speculation that the MPC could expand its purchases of gilts,” analysts led by David Woo, London-based global head of foreign-exchange strategy at Barclays Capital, wrote in a research note today. “Investor nerves ahead of the meeting may be weighing on the pound.”

The Bank of England will stick tomorrow with its current plan to spend as much as 125 billion pounds in newly printed money to boost the economy, according to a Bloomberg News survey of economists.

The pound may fall to a two-month low against the yen in coming weeks after it dropped below a so-called support level at 154.08 yen, Bank of Tokyo-Mitsubishi UFJ Ltd. said, citing trading patterns.

Support at 154.08 yen represents the neckline of a so- called “head-and-shoulders” pattern, which was completed when the pound closed at 153.15 yen yesterday, Masashi Hashimoto, a Tokyo-based senior analyst at the bank, said in an interview. A head and shoulders is formed when a currency makes three consecutive peaks, with the middle being the highest. The neckline is drawn across the base of the three peaks.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

Last Updated: July 8, 2009 07:27 E