Yen, Dollar Advance Against Euro on Signs of Economic Slump

By Ye Xie and Kim-Mai Cutler

Dec. 9 (Bloomberg) -- The yen and the dollar rose versus the euro as European reports showed the global economic slump deepened, increasing the haven appeal of the currencies.

The euro weakened as an index showed German investors became more pessimistic this month about current economic conditions. The pound tumbled as U.K. home sales fell to the lowest level since at least 1978 and factory production dropped almost three times as much as economists forecast in October.

“We’ve had another round of disappointing fundamental data worldwide,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “When global growth weakens, that tends to be positive for the yen.”

The yen appreciated 1.2 percent to 118.86 per euro at 9:48 a.m. in New York, from 120.26 yesterday. Against the dollar, the yen strengthened 0.3 percent to 92.54 from 92.82. The euro slid 0.9 percent to $1.2850 from $1.2963. The yen may gain to 90 per dollar in three months, according to Serebriakov.

Australia’s dollar fell 1.5 percent to 65.54 U.S. cents. It also slid 1.6 percent to 60.71 yen. National Australia Bank Ltd. said its sentiment index for November fell one point to minus 30, the lowest level since the series began in 1989.

The dollar declined against the yen on speculation the U.S. housing slump will extend into a fourth year. An index of pending home resales fell 3 percent in October after dropping 4.6 percent in the prior month, according to the median forecast of 34 economists in a Bloomberg News survey. The National Association of Realtors will release the data at 10 a.m. in Washington.

Yen’s Gains

The yen has gained this year against all 178 currencies tracked by Bloomberg News as central banks lowered interest rates to revive their economies, prompting investors to unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.3 percent rate is the lowest among developed nations.

Japan’s currency advanced 21 percent versus the dollar, 37 percent against the euro and 71 percent against New Zealand’s dollar. It’s on pace for its first annual gain against the Brazil’s real, the euro and New Zealand’s dollar in at least six years.

Implied volatility on one-month euro-yen options rose to 49.62 percent on Oct. 27, the highest level since Bloomberg began tracking the data in 1999, prompting Stephen Jen, global head of currency research at Morgan Stanley in London, to suggest governments may intervene to prevent currencies from appreciating too quickly.

Sony’s Job Cuts

The stronger yen has eroded Japanese exporters’ revenue. Sony Corp, the world’s second-biggest consumer-electronics maker, said on Oct. 23 that net income will probably drop 59 percent in the year ending March 31. It said today plans to eliminate 16,000 jobs in the largest reduction announced by a Japanese company since the credit crunch drove the world into recession.

The euro fell against the dollar today as the ZEW Center for European Economic Research in Mannheim said investors became more pessimistic about current conditions, with an index of sentiment slumping to minus 64.5 from minus 50.4. German investor confidence unexpectedly rose in December, a separate index showed.

The European Central Bank cut its main refinancing rate 0.75 percentage point on Dec. 4 to 2.5 percent, the single deepest cut in its benchmark interest rate in history. ECB forecasts published last week show the euro-region economy will shrink about 0.5 percent next year, which would be its first full-year contraction since 1993.

Weaker Pound

The pound fell 1.6 percent to $1.4683 after the Office for National Statistics said today in London that factory production slid 1.4 percent, the eighth monthly drop and the longest streak of declines since the 1980 recession, when Margaret Thatcher was prime minister.

Home sales tumbled to the lowest level in three decades, the Royal Institution of Chartered Surveyors said.

The Bank of England last week cut its benchmark interest rate to 2 percent, the lowest in half a century, as policy makers sought to prevent deflation from taking hold. The economy contracted 0.5 percent in the third quarter, after zero growth in the second.

“Sterling can lose more ground against the dollar,” said Thomas Harr, a senior currency strategist in Singapore at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia. “The outlook for the British economy looks pretty horrible. We think the BOE will cut rates quite dramatically.”

BOE Rate

The pound may fall as low as $1.35 in the first quarter as the Bank of England lowers its benchmark rate to 0.5 percent, Harr forecast.

The dollar has gained 35 percent versus the pound this year and 14 percent against the euro as the credit-market seizure and $980 billion of losses on mortgage-related securities worldwide led investors to repatriate overseas investment to the U.S. and seek shelter in the Treasuries.

Demand for U.S. government bonds pushed the yield on the 10-year note to 2.505 percent on Dec. 5, the lowest since at least 1962, when the Federal Reserve’s daily records began.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net