Yen Rises as U.S. Retail Drop Reduces Demand for Higher Yields

By Daniel Kruger and Michael J. Moore

Nov. 14 (Bloomberg) -- The yen rose, heading for weekly gains against the euro and the dollar, as a drop in U.S. retail sales prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan's currency.

The dollar was headed for a second weekly gain versus the currencies of six major trading partners as investors sought the relative safety of U.S. assets. The yen climbed against the Australian and New Zealand dollars on speculation a Group of 20 nations summit will fail to reach a consensus on resolving the credit crisis, sapping carry trades.

``Consumers are falling off a cliff,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``It's more positive for the yen than it is for the dollar, but the dollar will do well against all the other currencies.''

The yen rose 0.8 percent to 96.94 per dollar at 10:07 a.m. in New York, from 97.68 yesterday. Against the euro, the yen climbed 1.2 percent to 123.26 from 124.78. The euro fell 0.6 percent to $1.2698 from $1.2769. The pound decreased 0.6 percent to $1.4740.

The ICE's Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and the Swedish krona, reached 88.15 yesterday, the highest level since April 2006. The dollar increased 1.2 percent versus the currencies this week, according to the index.

Sales at U.S. retailers fell 2.8 percent in October after dropping 1.3 percent the previous month, the Commerce Department reported today in Washington. The median forecast of 73 economists surveyed by Bloomberg News was for a 2.1 percent reduction last month.

Consumer Sentiment

The Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly rose to 57.9, from 57.6 in October. The measure averaged 85.6 in 2007.

Japan's currency advanced 2.2 percent to 63.65 against the Australian dollar and 3.1 percent to 54.14 versus the New Zealand dollar on speculation investors will unwind trades in which they get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.3 percent target lending rate compares with 1 percent in the U.S., 5.25 percent in Australia and 6.5 percent in New Zealand.

The euro fell 1.3 percent this week against the yen, while the British pound slid 5 percent versus the greenback as the European Central Bank and the Bank of England faced mounting pressure to lower borrowing costs.

Bernanke on Markets

``The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain,'' Fed Chairman Ben S. Bernanke said today at a panel discussion hosted by the European Central Bank in Frankfurt. ``For this reason, policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.''

Gross domestic product in the 15 euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's Luxembourg-based statistics office said today. The two quarters of contraction -- the result of this year's surges in the cost of credit, the euro and oil prices -- mark the first recession since the single currency was introduced almost a decade ago.

``The real pressure on the euro is coming from expectations of a more dramatic frontloading of the rate-easing cycle by the ECB,'' said Peter Frank, a London-based currency strategist at Societe Generale SA, France's second-biggest bank by market value. ``This is definitely a big negative for the euro right now. It's very much a macro-driven move.''

The Bank of England is prepared to cut rates from 3 percent, Governor Mervyn King said this week.

The yen rose 1.9 percent versus the dollar this week, its biggest gain since Oct. 24. It advanced 2.2 percent against the euro, 4.3 percent versus the Aussie and 7.8 percent versus the New Zealand dollar this week.

Bush Assessment

U.S. President George W. Bush urged leaders of the world's biggest economies yesterday not to abandon free-market capitalism following the seizure in credit markets. G-20 leaders including Australian Prime Minister Kevin Rudd and French President Nicolas Sarkozy have used the crisis to demand greater government control of markets and to attack the U.S. for failing to rein in investors and speculators.

Leaders of G-20 countries were gathering in Washington to debate proposals ranging from curbing executive pay and restraining hedge funds to raising capital requirements for banks after financial institutions worldwide lost $958 billion on securities tied to U.S. mortgages.

Volatility implied by dollar-yen options expiring in one month was last at 23.11 percent, compared with an almost two- week high of 28.55 percent reached yesterday. Gains in volatility, a measure of expectations for future currency moves, may discourage carry trades because they make profits harder to predict.

``No one is betting on volatility going down,'' said Shinichi Takasaka, manager of foreign-exchange and financial- products trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed bank. ``I don't see any practical plan coming out of the G-20. That's part of the reason why the yen is rising.''

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net