Yen Rises Against Euro as Stock Slump Damps Demand for Risk

By Agnes Lovasz and Stanley White

Nov. 11 (Bloomberg) -- The yen rose against the euro as declines in stocks damped demand for purchases of higher- yielding currencies funded by loans in Japan.

Japan's currency gained most versus the Brazilian real and the South African rand as commodities fell after China reported the slowest growth in imports since June 2007. The pound dropped to an all-time low against the euro amid further evidence of a housing slump. The Russian ruble fell the most in at least a month versus the central bank's dollar-euro basket as traders speculated the central bank is allowing it to weaken.

``Yen strength will continue,'' said Neil Jones, head of European hedge fund sales in London at Mizuho Capital Markets. ``The biggest theme in currency markets is the lack of confidence going through the whole planet. The price action is telling you there's more contagion ahead. This is certainly not over.''

The yen strengthened to 124.50 per euro as of 6:42 a.m. in New York, from 124.95 yesterday. It advanced to 97.75 per dollar, from 98.00. The euro was at $1.2739, from $1.2748.

Trading volumes may be lower than normal because U.S. financial markets are closed today for a public holiday.

Japan's currency gained versus the currencies of commodity- exporting nations such as Brazil and South Africa after China's customs bureau said import growth slowed to 15.6 percent, signaling weakening domestic demand in the world's fourth- largest economy. The yen will rise to 90 per dollar and 100 per euro by the end of March, Jones predicted.

Carry-Trade Demand

The yen typically gains when demand for higher-yielding currencies declines as investors cut carry trades, where they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.3 percent target lending rate is the lowest among major economies.

Stocks fell, with the MSCI World Index losing 1.1 percent as all 10 industry groups decreased. Futures on the Standard & Poor's 500 Index slid 0.3 percent. Europe's Dow Jones Stoxx 600 Index declined 1.4 percent.

The ruble declined 1 percent versus the currency basket that the central bank uses to manage its fluctuations. The basket consists of about 55 percent dollars and 45 percent euros.

Bank Rossii Chairman Sergey Ignatiev said yesterday he doesn't exclude ``an increase in the flexibility of the ruble exchange rate.'' Under current conditions, the ruble may have a ``certain tendency toward weakening,'' he said.

Against the dollar, the Russian currency slid as much as 1.3 percent to 27.3975, from 27.0535. It weakened to 34.8290 per euro, from 34.4886.

Euro Falls

The euro declined versus the dollar as traders increased bets the European Central Bank will reduce its 3.25 percent rate in the first quarter of next year to kickstart economic growth. The implied yield on Euribor futures contracts expiring in March fell to 2.86 percent yesterday, from 3.005 percent on Nov. 7. The ECB benchmark is 0.39 percentage point higher than the Euribor contract yield, compared with a 12-month average of 19 basis points below the futures rate.

ECB council member Guy Quaden said he expects the bank to reduce its forecasts for economic growth and inflation ``substantially'' next month, paving the way for lower rates.

``It's more than probable'' that the ECB ``will have to modify substantially its projections in December for growth and inflation,'' he told Bloomberg News yesterday in Sao Paulo. ``It's surely not excluded that the revision of the projections will have consequences on the field of our monetary policy.'' The ECB will publish revised growth and inflation projections at its next policy meeting on Dec. 4.

ZEW Index

``The euro area's economy isn't doing well and rate cuts are likely to continue,'' said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale SA, France's second- largest bank by market value. ``The euro may be sold.'' The euro may decline to $1.2600 and 123.50 yen today, he said.

The euro strengthened earlier following a report showing German investor confidence unexpectedly rose in November as governments and central banks stepped up efforts to fight the turmoil on financial markets. The ZEW Center for European Economic Research said its index of investor and analyst expectations increased to minus 53.5, from minus 63 in October. Economists expected an unchanged reading, according to a Bloomberg survey.

Leaders of the Group of 20 industrial and emerging nations, due to gather Nov. 14 and Nov. 15 in Washington, will consider steps ranging from raising bank-capital standards to regulating hedge funds to address the financial crisis. Member nations' finance ministers called for interest-rate cuts and increased government spending after meeting two days ago in Sao Paulo.

Pound's Record Low

The pound fell to a record low against the euro after the Royal Institution of Chartered Surveyors said U.K. home sales declined to the lowest level in at least three decades. The British currency slipped to an all-time low of 82.15 pence per euro, from 81.67 pence yesterday.

Japan's Nikkei 225 Stock Average dropped 3 percent as Citizen Holdings Co., the world's biggest maker of mechanical watches, cut its annual earnings target by a third. More than half of the 922 Japanese companies that have already reported first-half earnings reduced full-year profit targets, according to a report by Shinko Research Institute Co.

Japan's economy will contract 0.2 percent next year, the U.S. by 0.7 percent and the euro area 0.5 percent, the International Monetary Fund forecast last week.

The dollar may fall to 96.85 yen as soon as this week, according to an Elliott Wave chart that predicts price movements, said Andrew Chaveriat, a technical analyst at BNP Paribas SA in New York.

The chart shows the U.S. currency has begun a third wave, where the dollar may decline against the yen, wrote Chaveriat in a research report yesterday. Support at 96.85 yen is a 38.2 percent Fibonacci retracement of the dollar's climb from the Oct. 24 low of 90.93 yen to the Nov. 4 high of 100.55 yen. Support is where buy orders may be clustered.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net