Yen Rises to Week High Versus Euro on Rate Outlook, Stock Slide

By Ron Harui

March 22 (Bloomberg) -- The yen rose to a one-week high against the euro on speculation more central banks will follow India in raising interest rates to curb inflation and as Asian stocks declined.

Japan’s currency gained versus 15 of 16 major counterparts after the Reserve Bank of India unexpectedly raised borrowing costs on March 19, fueling expectations nations such as China will do the same. The euro fell a fourth against the dollar on concern the European Union will fail to agree on an aid package for Greece. The pound weakened on speculation Dubai World will prolong the repayment of its loans, hurting U.K. banks.

“We’ve had India, and we’re assuming China is not too far away from a formal rate hike,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “It’s something the market is going to have to deal with, and it may unnerve markets a little bit. The yen and dollar might be supported.”

The yen rose to 122.24 per euro as of 6:01 a.m. in London from 122.51 in New York last week, after earlier climbing to 122.19, the strongest since March 10. Japan’s currency was at 90.49 per dollar from 90.54. The euro slid to $1.3506 from $1.3530 on March 19, when it weakened to $1.3503, the lowest since March 2.
The pound dropped 0.5 percent to $1.4941, and declined to 90.44 pence per euro from 90.12 pence.

Indian Rates 

The yen and the dollar strengthened versus most higher- yielding currencies after India’s central bank last week raised its benchmark reverse repurchase rate to 3.5 percent from 3.25 percent and the repurchase rate to 5 percent from 4.75 percent. The decision came a month before the bank’s next scheduled policy meeting.
Central banks in Australia and Malaysia already raised borrowing costs this month and China boosted its reserve- requirement ratio by half a percentage point on Jan. 18 and again on Feb. 25.

“The surprise factor in the RBI’s action was not that they hiked rates, but that it took place ahead of the next policy meeting, a fact that reflects the urgency to tackle inflation pressures,” Mitul Kotecha, head of global currency strategy at Credit Agricole CIB in Hong Kong, wrote today in a research note. “Further rate hikes are likely over coming months.”

Asian Currencies 

Malaysia’s ringgit and South Korea’s won led Asian currencies lower as regional stocks declined following India’s rate increase.

The ringgit slipped 0.6 percent to 3.3200 per dollar, and the won slid 0.3 percent to 1,135.75. The MSCI Asia-Pacific Excluding Japan Index lost 1.1 percent.

“A lot of Asian currencies have strengthened because of equity inflows lately,” said Nizam Idris, a currency strategist at UBS AG in Singapore. “If you hike interest rates, the equities market will react negatively first. That would basically take away the recent driving force” for currencies.

The euro fell toward a two-week low versus the dollar after German Chancellor Angela Merkel told investors that they shouldn’t expect this week’s EU summit to agree on any aid package for Greece.

EU leaders must not create “illusions” for markets by building expectations for Greek aid, she said in an interview with Deutschlandfunk that aired yesterday. Her remarks came after Greek Prime Minister George Papandreou and European Commission President Jose Barroso said the EU should spell out its rescue plan at the March 25-26 summit in Brussels.

‘Weigh on the Euro’ 

“Ahead of the EU summit, concerns about Greece’s funding difficulties are expected to weigh on the euro,” said Danica Hampton, a senior markets strategist at Bank of New Zealand Ltd. in Wellington. “Meantime, the dollar will likely remain firm as investors fret about how the global economy will cope with further stimulus removal.”

The pound declined for a third day against the dollar after the Times newspaper reported that Dubai World will ask for eight more years to repay its creditors.

The state-owned holding company, which is restructuring $22 billion of debt, will promise to repay all debts if it’s granted the extension, the London-based newspaper reported, without saying where it got the information. Dubai World will put its plan before a seven-person panel of senior creditors this week, The Times reported yesterday.

“This article could be one of the possibilities for why the pound is weak,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “It would be negative for risk sentiment and for U.K. banks that have loan exposure to that company.”

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.
Last Updated: March 22, 2010 02:02 EDT