Bloomberg News

Yen Advances to Strongest Since Intervention on Europe Concerns

November 13, 2011

Nov. 11 (Bloomberg) -- The yen rose to the strongest against the dollar since Japan’s government intervened last month to weaken it as concern Europe’s spreading debt crisis will dent global growth spurred investors to seek haven assets.

The Japanese currency was poised to gain against all 16 major counterparts this week before Italy sells as much as 3 billion euros ($4.1 billion) of five-year bonds on Nov. 14, testing investor appetite for the nation’s debt. The dollar strengthened against most peers for the period after U.S. Treasury Secretary Timothy F. Geithner said Europe remains the “central challenge” to growth. South Korea’s won gained as the central bank left borrowing costs unchanged for a fifth month.

“The Japanese themselves are, at least very recently, not investing much offshore, and in fact pulling money back to Japan,” said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “In this sort of an environment the yen is a genuine safe haven because it’s a current account-surplus currency.”

The yen advanced to 77.49 per dollar, the strongest since Japan sold the currency Oct. 31, and was at 77.54 as of 6:32 a.m. in London from 77.65 yesterday in New York. It traded at 105.57 against the euro from 105.66, set for a 2.1 percent climb this week. The euro traded at $1.3616 from $1.3606 yesterday and $1.3792 last week.

Italy’s 10-year government bond yield soared to as high as 7.48 percent on Nov. 9. Bond investors charged the nation an interest rate of 6.087 percent yesterday to buy 5 billion euros of one-year bills, the highest in 14 years.

Italian Austerity Vote

Italy’s Senate will vote on debt-reduction measures today in an attempt to shore up investor confidence and pave the way for a new government that may be led by former European Union Competition Commissioner Mario Monti.

“There’s still a lot to muddle through,” said Chris Weston, an institutional dealer at IG Markets in Melbourne. “The dollar and the yen will still be attracting those safe haven flows.”

The dollar gained 1.3 percent and the yen has appreciated 2.3 percent this week, according to Bloomberg Correlation- Weighted Indexes. The two currencies were the best performers among the 10 developed-nation peers tracked by the gauges.

The yen tends to strengthen in periods of financial and economic stress because Japan’s export-reliant economy doesn’t need foreign capital to balance current accounts -- the broadest measure of trade. The dollar tends to rise because of its status as the world’s reserve currency.

Far-Reaching Impact

Europe’s debt woes may have an impact beyond its borders, with concern mounting about the outlook for the global economy.

India’s industrial production grew in September at the slowest pace in two years, with output rising 1.9 percent from a year earlier compared with the median estimate for a 3.5 percent gain in a Bloomberg News survey. Hong Kong’s economic expansion likely weakened in the third quarter from the year before, according to a separate poll before the data is reported today.

The Bank of Korea kept its benchmark interest rate unchanged at 3.25 percent today, in line with forecasts. Bank Negara Malaysia will also keep its benchmark overnight policy rate at 3 percent today, a separate survey showed.

The won strengthened 0.7 percent to 1,126.61 per dollar, after sliding 1.5 percent yesterday, according to data compiled by Bloomberg. The currency fell 1.4 percent this week.

Indonesia yesterday joined countries from Brazil to Australia in lowering borrowing costs to boost spending at home.

Geithner Comments

Geithner, who is in Honolulu attending the 21-nation Asia- Pacific Economic Cooperation conference, said in prepared remarks that the APEC countries are all directly affected by the euro-zone crisis and he encouraged them “to take steps to strengthen growth in the face of these pressures from Europe.”

Japanese Finance Minister Jun Azumi said today he’s on guard against speculative yen trades while declining to comment on whether the nation has been selling the currency this month.

Japan intervened after the yen reached a post-World War II high of 75.35 per dollar on Oct. 31. Barclays Bank Plc and Tokyo-based Totan Research Co. estimate that the nation sold 8 trillion yen ($103 billion) that day, based on changes in the central bank’s balance sheet.

Papademos, Monti

The euro maintained yesterday’s gain against the dollar after former European Central Bank Vice President Lucas Papademos was given the mandate to form a Greek unity government.

Italian President Giorgio Napolitano met Monti yesterday in Rome for a “courtesy visit” a day after making him a senator for life, which will grant him voting rights in the Senate.

“We’ve had confirmation of Papademos and strong indications that Mario Monti will take over in Italy -- you could scarcely choose names that the market would like to see more,” said Westpac’s Callow. “With so many speculators already short euro, we’re probably in for a little stability and maybe even a creep higher for the next session or two.”

The 17-nation euro was still headed for its second weekly loss versus the dollar before reports next week that may show the region’s economy is struggling to recover.

Euro-zone industrial production probably declined 1.5 percent in September, according to the median estimate of six economists surveyed by Bloomberg before the figures are released on Nov. 14. A report the following day may show the region’s gross domestic product grew 0.2 percent in the third quarter, the same pace as the previous period, according to a separate survey. That’s the slowest expansion since the three months ended June 2009 when it contracted.

‘Still Very Weak’

“The macro backdrop in Europe is still very weak and could get worse,” said IG Markets’ Weston. “I wouldn’t rule out a move in the medium term in the euro to around $1.30 or below.”

The European Commission yesterday cut the region’s growth forecast for next year to 0.5 percent from 1.8 percent. It predicts the economy may expand 1.5 percent this year, down from a previous projection of 1.6 percent.

The euro will be at $1.35 by year-end, according to the median estimate of forecasters surveyed by Bloomberg News.

--Editors: Jonathan Annells, Benjamin Purvis

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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