Yen Falls to 8-Month Low as Recovery Signs Damp Safety Demand

By Ron Harui

May 4 (Bloomberg) -- The yen fell to an eight-month low against the dollar and weakened versus the euro as signs the global economic recovery is gaining momentum damped demand for Japan’s currency as a refuge.

The yen dropped against all 16 of its major counterparts before reports today that economists said will show U.S. home sales gained for a second month and U.K. manufacturing expanded. Australia’s dollar rose toward its highest level in 19 months against the yen on speculation the Reserve Bank will raise interest rates at a meeting today.

“There’s every reason to believe that growth prospects will be very good,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s largest interdealer broker. “The mood is for risk taking, and we’ll see a drop in the yen.”

Japan’s currency declined to 94.92 per dollar as of 11:23 a.m. in Singapore from 94.54 in New York yesterday, after earlier falling to 94.99, the weakest since Aug. 24, 2009. It dropped 0.4 percent to 125.29 per euro and lost 0.3 percent to 87.78 versus Australia’s dollar.

The euro was at $1.3199 from $1.3195 yesterday, after dropping to $1.3115 on April 28, the weakest since April 28, 2009. Japanese financial markets were shut today for a holiday.

Manufacturing, Spending

The yen slipped after U.S. reports yesterday showed manufacturing in the world’s largest economy grew at the fastest pace since June 2004 and consumer spending increased.

U.S. pending home sales rose 5 percent in March, and a gauge of U.K. manufacturing climbed to 57.5 in April from 57.2 in March, according to Bloomberg News surveys. U.S. companies added 188,000 workers in April, up from 162,000 in March, a separate survey showed before the May 7 report.

“We expect a better-than-consensus non-farm payrolls print to support a medium-term higher dollar-yen, targeting the 96 level,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a research note today.

Japan’s currency also fell after Standard & Poor’s indicated a fiscal plan scheduled for next month by Prime Minister Yukio Hatoyama’s government may be key to whether it will cut the nation’s sovereign credit rating.

The proposal will be “an important statement of the government’s commitment” to rein in the deficit, William Hess, director of sovereign ratings for Asia, said yesterday in Tashkent, Uzbekistan. “Something has to appear to change our assessment for where things could end up.”

Australian Dollar

Australia’s dollar rose for a second day against the yen on speculation the South Pacific nation’s central bank will raise interest rates for a sixth time in seven meetings.

The Reserve Bank will boost the cash rate target to 4.5 percent, according to 18 of 24 economists surveyed by Bloomberg.

“We are leaning toward a 25 basis point hike this afternoon, given inflation is ticking up,” said Ian Fowler, senior corporate foreign exchange dealer at OzForex Ltd. in Sydney. “We may see Aussie continue to be supported and move higher against the yen.”

Benchmark interest rates of 4.25 percent in Australia and 2.5 percent in New Zealand compare with 0.1 percent in Japan, making the South Pacific nations’ assets attractive to investors seeking higher returns. The risk in such trades is that currency market moves will erase profits.

One-Year Low

The euro was near a one-year low against the dollar as investors sought more evidence that a 110 billion-euro ($145 billion) rescue package will resolve Greece’s debt crisis.

The three-year financial lifeline requires Greece to reduce its budget deficit below the European Union limit of 3 percent of gross domestic product by the end of 2014, a year later than originally planned. Aid for Greece is of “enormous” importance, German Chancellor Angela Merkel said yesterday after convening a special meeting of her Cabinet that approved loans for Greece of as much as 22.4 billion euros over three years.

“Even after the announcement of the aid package, investor uncertainty will unlikely decrease strongly until the member nations ratify the agreement,” Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, wrote in a research note yesterday. “Unresolved structural problems across the euro-zone will also weigh on investor sentiment.” The euro may drop to $1.30 in three months, he said.

Greek government workers plan to shut down hospitals and schools today and disrupt flights as protests escalate after 30 billion euros of additional wage cuts and tax increases were unveiled this week.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net.

Last Updated: May 3, 2010 23:28 EDT