Yen Rises on Speculation Japanese Exporters Buying the Currency

By Kosuke Goto and Stanley White

Aug. 7 (Bloomberg) -- The yen rose against the dollar and the euro on speculation Japanese exporters took advantage of its recent weakness to repatriate overseas earnings at a more favorable rate than they initially assumed.

Japan's currency rebounded from a seven-month low versus the dollar before a U.S. report today that may show pending home resales fell for a fifth month in June, highlighting a slowdown in the world's biggest economy. The euro may extend its decline on speculation the European Central Bank will signal the economy is slowing after its policy meeting today.

``It seems that exporters are selling foreign currencies for yen,'' said Gen Kawabe, senior currency manager in Tokyo at Chuo Mitsui Trust & Banking Co. ``This may push up the yen further as some traders won't want to miss the chance to buy it on the cheap.''

The yen advanced to 109.45 per dollar at 12:15 p.m. in Tokyo, from 109.79 yesterday, when it slid to 109.88, the lowest since Jan. 10. It also climbed to 168.92 against the euro from 169.16 in New York. Japan's currency may strengthen to 109.20 a dollar today, Kawabe forecast.

The dollar traded at $1.5434 versus the euro from $1.5408 in New York yesterday, when it touched $1.5398, the strongest since June 16.

Large Manufacturers

Large Japanese manufacturers forecast the yen would average 102.74 per dollar in the fiscal year started April 1, according to the Bank of Japan's quarterly Tankan business sentiment survey released on July 1.

The yen held on to its gains after a government report showed orders for Japanese machinery fell less than economists estimated in June. Orders, indicative of capital spending in the next three to six months, slid 2.6 percent from May, when they climbed 10.4 percent. Economists predicted a 9.9 percent drop, a Bloomberg survey showed.

Gains in the yen may be limited against the dollar after Shigeru Sugihara, head of business statistics at the Cabinet Office in Tokyo, said yesterday there is ``a high possibility'' the economy has entered a recession, acknowledging the longest postwar expansion had probably ended.

``While major currencies weaken due to their slowing economies, the yen weakness is still really lagging behind in currency markets,'' said Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo.

Japan's currency may fall to 115 per dollar in one month, he forecast.

`Technical Break'

``We saw a key technical break at 108.50, so we think that any pullbacks toward that 108.50 area would be a good place to short the yen and go long the dollar,'' said David Leaver, a senior trader at Gain Capital Group's Forex.com in Bedminster, New Jersey. ``We expect the dollar-yen to actually stage a significant recovery.''

A short is a trading strategy that benefits from a decline in the currency, while a long position profits on an advance.

Europe's single currency has dropped 2.1 percent versus the dollar this quarter on concern cooling demand across the region and a retreat in oil prices will deter ECB President Jean-Claude Trichet from raising interest rates.

``With the European economy weakening, Trichet cannot be very hawkish on inflation risks,'' said Yuji Saito, head of foreign-exchange sales in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``I rather expect dovish comments on the slowing economy. The euro has downside risk going into the ECB meeting.''

The euro may fall to $1.5350 against the dollar today, Saito forecast.

`Call It a Bluff'

The Frankfurt-based ECB, which increased borrowing costs last month, publishes today's decision at 1:45 p.m. and Trichet holds a press conference 45 minutes later. Separately, the Bank of England will leave its key rate at 5 percent, another survey of economists shows. That decision is due at noon in London.

Trichet said on July 3 that he had ``no bias'' or ``pre- commitment'' after policy makers increased the main refinancing rate a quarter-percentage point.

``I would call it a bluff if the ECB remains hawkish,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``Their growth numbers are pointing south. The ECB has to step away from their rhetoric eventually. The dollar is an attractive currency right now.''

German factory orders fell in June at the fastest pace in 11 months, while Spain's industrial production shrank at the fastest pace in 15 years, according to figures released yesterday by their respective governments. Retail sales in the 15-nation euro area tumbled the most in at least 13 years, according to a European Union report released the previous day.

Inflation Above Target

The inflation rate for the euro region accelerated to 4.1 percent in July, the fastest pace in more than 16 years and more than double the pace the ECB targets.

Traders pared bets the ECB will raise the main refinancing rate for a second time this year. The three-month Euribor contract for December yielded 5.04 percent yesterday, down from 5.06 percent on Aug. 5.

The Dollar Index on the ICE futures exchange, which tracks the dollar against the currencies of six U.S. trading partners, was at 74.121 after touching 74.307 yesterday, the strongest since June 13.

The Federal Reserve left borrowing costs unchanged on Aug. 5 at 2 percent, saying ``downside risks'' to growth remain, while inflation is a ``significant concern.''

To contact the reporters on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net