Yen Falls as Signs of Economic Recovery Spur Demand for Risk

By Ben Levisohn

April 20 (Bloomberg) -- The yen dropped against all of its major counterparts as speculation the global economic recovery will gain momentum encouraged demand for higher-yielding assets.

Canada’s dollar increased the most in more than three months and traded stronger than parity against the greenback after the nation’s central bank said it will start raising interest rates because of faster-than-expected economic growth and inflation. The dollar advanced versus the yen for a second day as U.S. stocks rose on Goldman Sachs Group Inc.’s earnings.

“You’re still seeing risk-seeking,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “Some of the data was stronger, and you had some good earnings. That’s hurting the yen.”

The yen depreciated 0.6 percent to 125.40 per euro at 10:09 a.m. in New York, from 124.64 yesterday. Japan’s currency slid 0.8 percent to 93.12 per dollar, from 92.40. The euro traded at $1.3466, compared with $1.3489.

Australia’s dollar increased 1.6 percent to 86.76 yen and South Africa’s rand rose 1.4 percent to 12.57 yen on speculation investors will increase carry trades, in which they buy higher- yielding assets with amounts borrowed in nations with low interest rates. Japan’s benchmark of 0.1 percent has made the yen popular for funding such transactions.

The Standard & Poor’s 500 Index advanced 0.5 percent as Goldman Sachs, facing a fraud lawsuit from U.S. regulators, reported net income almost doubled in the first quarter and said it didn’t mislead investors.

‘Risk-Taking Mode’

“For now the markets are returning to risk-taking mode, reflected by renewed yen weakness,” Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a note to clients today.

Canada’s dollar rallied as much as 1.7 percent to 99.78 Canadian cents against the U.S. dollar in the biggest intraday advance since Jan. 4. It later traded at 98.85 Canadian cents per U.S. dollar, compared with C$1.0144 yesterday.

The central bank dropped a phrase regarding its “conditional commitment” to keep the target lending rate unchanged until July unless the inflation outlook shifted. The benchmark was held today at a record low 0.25 percent, as forecast by all of 25 economists in a Bloomberg News survey.

“Dropping the conditional pledge is a very strong pointer to a rate hike coming as soon as June,’’ said Shaun Osborne, chief currency strategist in Toronto at Toronto-Dominion Bank, Canada’s second-largest lender. “Given the overall tone here, this is a very strong statement on the near-term outlook for the Canadian economy.”

Sweden’s Krona

Sweden’s krona appreciated as much as 0.6 percent to 9.6251 per euro, the strongest level since October 2008, after the Riksbank reiterated a forecast to boost its seven-day repo rate in “summer or early autumn.” It kept the rate at 0.25 percent today, as predicted in a Bloomberg survey of economists.

The euro rose for a second straight day versus the yen after a report showed German investor confidence increased this month, beating economists’ forecasts.

The Mannheim, Germany-based ZEW Center for European Economic Research’s index of investor confidence rose to 53 from 44.5 in March in the first increase in seven months. The median forecast of 36 economists in a Bloomberg News survey was for an increase to 45.1.

Australia’s dollar rose for the first time in four days against the greenback as the central bank said in minutes of its April 6 policy meeting that concern that a mining boom will stoke inflation was a main reason policy makers raised the target lending rate to 4.25 percent.

Aussie Rate Outlook

There’s a 33 percent chance Australia’s central bank will raise rates when it meets on May 4, compared with 21 percent odds yesterday, according to a Credit Suisse Group AG index.

“Given that we’re not quite at the neutral level yet, the RBA is likely to probably hike again in May if the inflation data in particular surprises to the upside,” said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada. The minutes are “being seen as supportive for the Aussie dollar,” she said.

The Aussie increased 0.7 percent to 93.06 U.S. cents after reaching 93.89 U.S. cents on April 12, the highest level since Nov. 16.

India’s rupee climbed 1.3 percent to 2.09 yen after the central bank raised interest rates for the second time in a month, to 5.25 percent. It ordered lenders to set aside more cash as reserves in a bid to slow the highest inflation rate among the Group of 20 nations.

To contact the reporter on this story: Ben Levisohn in New York at blevisohn@bloomberg.net

Last Updated: April 20, 2010 10:16 EDT