Yen Declines Against Euro on Outlook for Interest-Rate Spread

By Stanley White

June 30 (Bloomberg) -- The yen fell for the first day in three against the euro on speculation the Bank of Japan will keep borrowing costs on hold while the European Central Bank prepares to raise rates.

Japan's currency also declined against the U.S. and Australian dollars before the BOJ's quarterly Tankan survey tomorrow that will probably show business confidence slumped to the lowest in almost five years. ECB policy makers will raise interest rates a quarter-percentage point to 4.25 percent when they meet July 3, according to a survey of economists by Bloomberg News.

``Demand for overseas assets with higher yields is pushing the yen lower,'' said Koichi Yoshikawa, head of currency trading at BNP Paribas in Tokyo. ``It's nonsense for the BOJ to raise rates. That increases the appeal of the euro and other currencies.''

The yen fell to 168.02 against the euro at 11:02 a.m. in Tokyo from 167.58 late in New York on June 27. Against the dollar, it declined to 106.42 from 106.13. The dollar was at $1.5788 against the euro from $1.5794, the lowest since June 9. The yen may fall to 168.30 against the euro and 106.60 per dollar today, Yoshikawa forecast.

The yen declined to 102.44 per Australian dollar from 101.99 in New York and to 81.19 against the New Zealand dollar from 80.75. The Aussie, as Australia's currency is known, climbed to 96.26 U.S. cents from 96.10 cents as prices of commodities the nation exports rose to records.

Quarterly Performance

The dollar headed for a 6.6 percent quarterly gain against the yen, its biggest since December 2001, after finance ministers from the Group of Seven nations said on April 11 they were concerned about the impact of ``sharp fluctuations in major currencies.'' The euro was little changed against the dollar this quarter after rising 8.2 percent in the January-March period. The euro advanced 6.7 percent against the yen this quarter, the most since June 2003, on speculation the rate differential between the two currencies will expand.

The yield spread on two-year German government debt over similar maturity Japanese government note widened to 3.64 percentage points from 3.63 percentage points at the end of last week.

Japanese Rates

The BOJ's Tankan index of sentiment will slide for a third straight quarter to 3 points in June from 11 in March, according to the median estimate of 32 economists surveyed by Bloomberg News. The report is due tomorrow at 8:50 a.m. in Tokyo. A positive number means optimists outnumber pessimists.

The Bank of Japan will keep its target lending rate at 0.5 percent through September 2009, a Bloomberg News survey of economists showed. Benchmark rates are 4 percent in Europe, 7.25 percent in Australia and 8.25 percent in Brazil.

The dollar was near a three-week low against the euro before a reports this week that may show declines in payrolls and manufacturing, limiting the Federal Reserve's scope to reverse seven interest-rate cuts since September.

U.S. nonfarm payrolls shrank by 60,000 workers, according to the median estimate of economists surveyed by Bloomberg News before the Labor Department's report on July 3. That would follow a decline of 49,000 in May that brought the number of jobs lost this year to 324,000.

U.S. Economy

The Institute for Supply Management's factory index fell to 48.6 in June from 49.6 the previous month, according to a separate survey. A reading below 50 signals contraction. The ISM will release the data tomorrow.

``Sentiment is for the dollar to weaken further,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``U.S. economic data simply don't support the case for a rate hike. With the ECB likely to raise rates, that makes the euro seem more attractive.''

The U.S. currency may fall to 106.10 yen and $1.5840 per euro today, he said.

Futures on the Chicago Board of Trade show a 25 percent chance that the U.S. Fed will increase the target rate for overnight lending between banks by a quarter-percentage point to 2.25 percent at its next meeting on Aug. 5, compared with 40 percent odds a week ago.

The euro was supported by speculation a report today will show inflation accelerated in June, boosted by record oil costs and higher food prices, allowing ECB President Jean-Claude Trichet to raise interest rates to fight inflation.

The inflation rate in the euro area rose to 3.9 percent, from 3.6 percent in May, the European Union statistics office in Luxembourg may say today, according to the median of 38 estimates in a Bloomberg survey. The ECB aims to keep consumer- price growth below 2 percent.

``The euro remains firm ahead of the ECB meeting,'' said Masaki Fukui, a senior economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded financial group. ``The ECB may raise rates beyond July, possibly in September or October. There is a possibility Trichet may signal it after the meeting this week.''

Europe's single currency may move between $1.56 and $1.60 against the dollar this week, Fukui said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net