Yen Strengthens as Manufacturing Slump Weakens Yuan, Ruble

By Bo Nielsen

Dec. 1 (Bloomberg) -- The yen rose against the euro and the dollar as falling stocks and shrinking manufacturing in China and Russia encouraged investors to buy back the Japanese currency at the expense of higher-yielding assets.

The yen rose versus the British pound and New Zealand dollar as reports showed a slump in South Korean exports and a decline in Japanese wages. China’s yuan fell the most in seven weeks as manufacturing contracted by a record, while the ruble slid to a 2 1/2-year low as output shrank more than during the 1998 crisis. Central banks in the U.K., the euro region, Australia and New Zealand are forecast to cut interest rates by as much as 1.5 percentage points this week to stem the slump.

“There’s evidence that the global slowdown is getting deeper,” said Michael Klawitter, a currency strategist with Dresdner Kleinwort in Frankfurt. “Central banks across the globe will converge at extremely low levels and that’s firmly positive for the yen.”

The yen appreciated 1.8 percent to 119.03 per euro at 7:02 a.m. in New York, from 121.22 on Nov. 28. It strengthened 1.7 percent to 93.90 per dollar. The dollar was at $1.2673 per euro from $1.2691. The yen will trade at 116 per euro by the end of this week, Klawitter said.

The Dow Jones Stoxx 600 Index of European shares dropped 3 percent after surging 13 percent last week. Shares in Inpex Corp., Japan’s biggest oil explorer, lost 4.4 percent on speculation China’s contraction in manufacturing will reduce demand for commodities.

The Japanese currency gained 4 percent to 141.03 per pound, the biggest jump since Nov. 12, and 3.6 percent against the Australian dollar.

Japanese Investors

The yen appreciated against all major currencies except South Korea’s won as concern of a global recession prompted domestic investors in Japan to bring back overseas earnings.

“Japanese investors tend to repatriate capital during periods of risk aversion,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney.

Japan’s benchmark interest rate of 0.3 percent compares with 5.25 percent in Australia, 6.5 percent in New Zealand, 3.25 percent in euro-zone and 3 percent in the U.K.

Interest rates will be lowered 1.5 percentage points to 5 percent in New Zealand, to 4.5 percent in Australia, to 2 percent in the U.K. and to 2.75 percent in the euro region this week as central banks move to stem the economic slowdown, according to Bloomberg surveys.

Yuan Declines

“Aggressive rate cuts from the central banks meeting this week are required and will ensure the dollar and yen remain the best-performing currencies over the coming months,” Derek Halpenny, head of currency research at Bank of Tokyo-Mitsubishi in London, wrote in a note to clients today.

China’s purchasing Managers’ Index fell to a seasonally adjusted 38.8 in November, from 44.6 in October, the China Federation of Logistics and Purchasing said today. South Korean exports tumbled 18.3 percent in November from a year earlier.

The yuan traded at 6.8816 per dollar, from 6.8346 at the end of last week. U.S. Treasury Secretary Henry Paulson visits Beijing for trade talks in three days’ time.

A recession in Japan deepened last month as manufacturers planned the sharpest production cuts in 35 years and consumers cut spending. Monthly wages, including overtime and bonuses, fell 0.1 percent in October to 274,751 yen ($2,883) from a year earlier, the Labor Ministry said in Tokyo.

The Bank of Japan will hold an emergency meeting this week to consider accepting a broader range of collateral from lenders as a way to help companies obtain funding, public broadcaster NHK said without citing anyone.

Nonfarm Payrolls

The dollar fell against the yen before U.S. reports this week that economists predict will show manufacturing shrank and employers cut jobs by the most since 2001.

U.S. nonfarm payrolls slid by 320,000 in November following a decline of 240,000 the previous month, according to a Bloomberg News survey before the Labor Department’s Dec. 5 report. The jobless rate may have jumped to 6.8 percent, the highest level since 1993, a separate Bloomberg survey showed.

“People may look more closely at the U.S. economy, so there’s some scope for dollar depreciation,” said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly listed lender. “Higher-yielding currencies are losing their appeal because the interest-rate differential isn’t working in their favor.”

Record Two-Year Yield

The Institute for Supply Management may say manufacturing contracted in November for a fourth month, according to another Bloomberg survey. The Tempe, Arizona-based Institute releases the data at 10 a.m. in New York.

The dollar still rose against all but three of the world’s most-traded currencies as investors sold higher-risk holdings for U.S. assets such as Treasuries. Gains for U.S. notes today drove the yield on the benchmark two-year security to an all- time low of 0.949 percent.

The euro declined against the dollar and the yen after a report last week showed the inflation rate dropped to 2.1 percent in November from 3.2 percent the previous month, giving policy makers more room to lower borrowing costs when they meet Dec. 4. Retail sales dropped 0.4 percent in October from the prior month, after a 0.2 percent decline in September, a separate Bloomberg survey shows. The report is due Dec. 3.

“European data continue to deteriorate at an increasingly rapid pace and the recent easing of inflation pressures means there is scope for a bold cut by the ECB,” said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. “For euro-dollar, this suggests a visit to the recent lows of between $1.2300 and $1.2400 is likely.”

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net