Yen Falls for Third Day on Global Recovery Signs; Euro Rises

By Ben Levisohn and Anchalee Worrachate

June 14 (Bloomberg) -- The yen declined for a third day against the euro and the dollar as signs the global economic recovery is gaining momentum damped demand for the perceived refuge of Japan’s currency.
The euro strengthened to the highest level in more than a week against the greenback after a report showed industrial production in the 16-nation region expanded at a faster pace than forecast. South Korea’s won advanced after policy makers refrained from imposing controls on capital flows. The Australian and New Zealand dollars rose versus the yen as higher stocks and crude oil spurred demand for higher-yielding assets.
“The market is now trying the risk-on trade,” said Hidetoshi Yanagihara, a senior currency trader at Mizuho Corporate Bank Ltd. in New York. “It looks like everyone was expecting negative news out of Europe but there is no negative news so the market is unwinding short positions.” A short is a bet a currency will decline.
The yen fell 1.5 percent to 112.67 per euro, the weakest level since June 4, at 8:46 a.m. in New York from 111 last week, after earlier dropping to 112.65, the weakest since June 4. Japan’s currency fell to 91.89 per dollar from 91.65. The euro climbed to $1.2261 from $1.2112, after reaching $1.2273, the strongest since June 3.

The MSCI World Index of shares gained 1 percent, after advancing 1.9 percent last week. Crude oil for July delivery rose 2.3 percent on the New York Mercantile Exchange.

Carry Trades 

The Australian dollar advanced 1.8 percent to 79.33 yen on speculation investors will boost carry trades, in which they borrow money in nations with low interest rates to invest in higher yielding assets. Japan’s benchmark rate of 0.1 percent, lower than Australia’s central bank rate rate of 4.5 percent, makes the yen a popular choice for funding such transactions.

The euro extended last week’s advance against the dollar and the yen after a report showed European industrial production expanded 0.8 percent in April, more than economists forecast, after a 1.6 percent increase in March.
The Bank of International Settlements said the euro’s 15 percent slump this year may fuel a resumption of economic growth by making local products cheaper than imported goods. The record budget deficits in countries including Greece had spurred speculation the 16-nation currency union may split.

‘Completely Unproblematic’ 

European Central Bank Governing Council member Ewald Nowotny said the euro’s volatility is “completely unproblematic” and doesn’t require any measures to counter it.
“The volatility can’t be explained with economic reasons. It’s partly due to elements of speculation,” Nowotny said in Vienna today. “However, I don’t want to exaggerate it. We don’t welcome it but we don’t see a reason to act.”
The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those betting on a gain was near a record on June 8, according to the Washington-based Commodity Futures Trading Commission.

Futures positions, when they reach an extreme, are sometimes viewed as a contrarian indicator because traders often seek to cut positions when momentum in a currency shifts.
“In the absence of any bad news about Europe, the euro correction could still have some room to go,” analysts led by Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co., wrote in a note to clients.

Korea’s Won 

South Korea’s currency gained for a second day versus the dollar after the government and central bank said yesterday that lenders will be required to rein in use of foreign-exchange forwards, options and swaps to reduce volatility in capital flows and the won. They stopped short of imposing capital controls.
“We finally know what these rules are and that has cleared the uncertainty,” said Jun Woo Ha, a Seoul-based currency dealer at Daegu Bank.

The won rose 2 percent to 1,222.15 per dollar, after slumping 3.6 percent last week.
The New Zealand dollar fell against the so-called Aussie after central bank Governor Alan Bollard said the strong currency has hindered efforts to reduce the country’s large investment-income deficit and overall external liabilities.

“The trade balance has improved with strong export prices and less demand for imports,” Bollard said in a speech in Wellington. “But a large deficit on the investment income balance is showing no signs of enduring improvement and the strong New Zealand dollar has not helped.”
New Zealand’s currency has risen 8.4 percent against the greenback in the past 12 months, the second best performance among major currencies after the Canadian dollar. The kiwi today rose 1.3 percent to 64.05 yen and climbed 1 percent to 69.72 U.S. cents.

To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net
Last Updated: June 14, 2010 08:52 EDT