Yen Falls as Signs of Global Recovery Reduce Demand for Safety
By Ye Xie
May 2 (Bloomberg) — The yen declined against the euro for the first time in a month and the dollar dropped after the Federal Reserve said the U.S. economic contraction is “somewhat slower,” reducing demand for the currencies as a refuge.
The Mexican peso fell against all of its major counterparts on speculation the outbreak of swine flu will extend the nation’s economic slump. An index tracking the dollar versus the currencies of six major U.S. trading partners fell for a second week before a U.S. Labor Department report forecast by economists to show employers eliminated fewer jobs in April.
“More and more bears are starting to recognize the green shoots are broadly based,” said Richard Benson, who oversees $14 billion of currency funds at Millennium Asset Management in London. “Money continues coming from the sidelines, which is weighing on the dollar and yen.”
The yen dropped 2.3 percent this week to 131.59 per euro, from 128.66 on April 24. It reached 132.35 yesterday, the weakest level since April 14. The yen declined 2 percent to 99.11 against the dollar, from 97.17 a week earlier. It touched 99.58 yesterday, the weakest level since April 17. The euro appreciated 0.2 percent to $1.3273, from $1.3230.
Australia’s dollar gained 3 percent to 72.40 yen this week as a 9.4 percent rally in the Standard & Poor’s 500 Index in April encouraged carry trades. South Africa’s rand advanced 4 percent to 11.60 yen.
“This is a gradual resumption of what will be an upward trend in most of the yen crosses,” said Henrik Gullberg, a foreign-exchange strategist in London at Deutsche Bank AG, the world’s largest currency trader.
Carry Trades
In carry trades, investors get funds where borrowing costs are low and invest where rates are higher. The target lending rate is 0.1 percent in Japan, zero to 0.25 percent in the U.S., 3 percent in Australia and 8.5 percent in South Africa.
Mexico’s peso slid 3.2 percent to 13.779 versus the dollar, the biggest weekly decline since November. The World Health Organization expected the number of confirmed worldwide cases, currently at 331, to grow. The agency raised its six-tier pandemic alert to 5, bringing it closer to declaring the first influenza pandemic since 1968.
The dollar dropped this week against 13 of its 16 most actively traded counterparts tracked by Bloomberg on reduced demand for safety after a report showing a plunge in U.S. gross domestic product also indicated smaller stockpiles may set the stage for a return to growth in the second half of the year.
The U.S. economy decreased at an annual rate of 6.1 percent in the first quarter, after shrinking 6.3 percent in the final three months of 2008, the Commerce Department reported this week. Companies trimmed stockpiles at a $103.7 billion annual rate last quarter, the biggest drop since records began in 1947.
U.S. Job Market
The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 0.2 percent this week to 84.55. It lost 5 percent in the past two months.
U.S. employers cut 610,000 jobs in April after eliminating 663,000 in the previous month, according to the median forecast of 39 economists surveyed by Bloomberg. The Labor Department is scheduled to release the report on May 8.
“As we move into the second half of this year, most of the world’s major economies will see the start of a sustainable recovery, and that will spur some dollar weakness as the safe- haven bid comes to an end,” said David Powell, a foreign- exchange strategist at Bank of America-Merrill Lynch, in a Bloomberg Television interview.
The Aussie appreciated for a ninth week against the greenback, climbing 1 percent this week to 73.06 in the longest stretch of five-day gains since December 2003. The rand touched 8.3868 per dollar yesterday, the strongest level since Oct. 3.
Treasury Yield
The yen fell against the dollar as the yield premium of 10- year U.S. notes over their Japanese counterparts increased. The spread gained 19 basis points, or 0.19 percentage point, to 176 basis points, the widest since Nov. 24.
The 10-year Treasury note’s yield increased 18 basis points, or 0.16 percentage point, to 3.15 percent, the highest level since November, after the Fed refrained on April 29 from increasing purchases of Treasuries and mortgage securities.
Japan’s currency will weaken to 115 per dollar in the next three to six months, Gullberg said.
The euro rose against the dollar this week before the May 7 meeting of the European Central Bank. Policy makers are forecast to lower the main refinancing rate to 1 percent from 1.25 percent, according to the median forecast of 44 economists surveyed by Bloomberg. The same day, the U.S. will release results of “stress tests” of the country’s 19 largest banks, according to a government official who spoke on condition of anonymity.
The pound rose 1.4 percent this week to 88.94 pence per euro. The Bank of England will keep its benchmark interest rate at 0.5 percent on May 7, according to the median forecast of a separate Bloomberg survey.
To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net
