Yen Heads for Weekly Loss Against Euro on Lure of Higher Yields

By Kosuke Goto

June 27 (Bloomberg) -- The yen headed for a seventh weekly decline against the euro, the longest losing streak since May 2007, as Japanese workers spend their summer bonuses on overseas assets offering higher yields.

The currency snapped a three-day gain against the dollar as Japanese finance companies seek to raise more than 1 trillion yen ($9.4 billion) for funds investing abroad by June 30, according to data compiled by Bloomberg. The euro traded near a three-week high versus the dollar on speculation the European Central Bank will raise interest rates next week, while traders bet the Federal Reserve will keep borrowing costs on hold in August.

``The yen was a bit overbought and this is giving Japanese investors a very attractive chance of buying foreign currencies on dips,'' said Seiichiro Muta, director of foreign exchange in Tokyo at UBS AG, the world's second-largest currency trader. ``The yen will weaken today.''

Japan's currency traded at 168.34 per euro as of 9:52 a.m. in Tokyo, from 168.30 yesterday in New York, when it touched a record low of 169.46. The yen dropped to 106.92 per dollar from 106.81 yesterday, when it rose to 106.62, the highest level since June 11. The dollar was at $1.5746 per euro from $1.5757 yesterday, when it dropped to $1.5767, the weakest since June 9.

The yen may fall to 169 a euro and 107.50 a dollar today, Muta forecast.

Japan's currency slid to 102.28 per Australian dollar from 102.08 in New York. It fell to 13.5031 per South Africa's rand from 13.4229. It dropped to 104.50 against the Swiss franc and approached the lowest level since February 1991.

Summer Bonuses

The yen remained lower after a government report today showed Japanese core consumer prices rose 1.5 percent in May from a year earlier, the fastest pace in a decade. The data also showed household spending fell for a third month.

``The BOJ will elevate a sense of vigilance against inflation,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp. ``But with the economy slowing, the central bank cannot raise interest rates any time soon. We expect the BOJ to wait to increase rates until April.''

The yen may fall to 108 a dollar by Sept. 30, she said.

Employees at private companies may get summer bonuses totaling 14.8 trillion yen from June to July, down 1.8 percent from a year earlier, according to Kazuyoshi Nakata, an economist in Tokyo at Mitsubishi UFJ Research and Consulting Co., a unit of Japan's largest publicly traded lender by assets. T&D Asset Management Co. will seek to raise 500 billion yen for a fund focused on Chinese environment-related business this month.

The Bank of Japan will keep its target lending rate at 0.5 percent through September of next year, according to the median forecast of 11 economists surveyed by Bloomberg News. Benchmark rates are 7.25 percent in Australia, 12 percent in South Africa and 12.25 percent in Brazil.

Fed Rate Outlook

The dollar headed for a second weekly loss against the euro as futures on the Chicago Board of Trade showed the chance of the Fed increasing its target rate at its next meeting on Aug. 5 fell to 25 percent, from 44 percent a week ago. The balance of bets is for rates to stay on hold.

Crude oil traded at $138.93 a barrel after jumping above $140 to a record yesterday as Libya threatened to cut production. Investors buy commodities as a hedge against the dollar when inflation erodes the value of the U.S. currency.

The Fed left its target lending rate at 2 percent on June 25, saying in a statement at the end of its two-day meeting that ``uncertainty'' about the inflation outlook remains high.

``People are starting to wonder whether the Fed has the guts to raise rates,'' said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. ``The dollar could test $1.60 in the next month.''

U.S. Inflation

The Fed's preferred gauge of annual inflation, which excludes food and fuel costs, increased to 2.2 percent in May, from 2.1 percent for the prior month, according to the median forecast of economists surveyed by Bloomberg News. Policy makers including Fed Chairman Ben S. Bernanke have said they prefer core inflation to be below 2 percent. The Commerce Department will deliver its report at 8:30 a.m. in Washington.

The dollar has gained 0.2 percent against the euro this quarter as traders bet the economic slowdown sparked by the collapse of the subprime-mortgage market will spread to Europe as the U.S. recovers.

European Central Bank President Jean-Claude Trichet reiterated in a June 25 speech that policy makers may increase the 4 percent main refinancing rate by a quarter-percentage point next month to contain inflation.

``The euro is generally benefiting from expectations the ECB will raise rates next week,'' said Marcus Hettinger, a currency strategist in Zurich at Credit Suisse Group, Switzerland's second-biggest bank. ``The ECB is focused on inflation, and that's supporting the euro. It's not the real economic data that's driving the euro.''

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net.