Dollar, Yen Rise Versus Euro as Slump Fuels Demand for Refuge

By Ron Harui and Stanley White

Jan. 30 (Bloomberg) -- The dollar and the yen headed for their biggest monthly gains versus the euro since October as growing evidence of a global slowdown increased the appeal of the currencies as a refuge from the financial crisis.

The euro declined for a second day versus Japan’s currency before reports that may show inflation in the 16-nation region slowed to the least in seven years and the jobless rate climbed to a two-year high. The yen was poised for a monthly advance versus Australia’s dollar after data today showed Japan’s industrial output slumped, unemployment surged and households cut spending, spurring investors to sell higher-yielding assets.

“For many investors the strategy is simple: avoid risk,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “That means funds are flowing back into the dollar and the yen. We can’t expect any good economic news from the U.S. or other major economies.”

The dollar rose to $1.2891 per euro as of 8:36 a.m. in London from $1.2954 in New York yesterday. It gained 8.4 percent this month, extending a 4.4 percent rally last year. The yen climbed to 115.10 versus the euro from 116.60, following a 29 percent appreciation last year. The dollar fell to 89.29 yen from 90.03 yen, bringing its decline in January to 2.3 percent.

The euro declined against 12 of the 16 most-active currencies this month, according to data compiled by Bloomberg. Billionaire George Soros said the currency may not “survive” unless the European Union pushes for a global plan to deal with toxic debt, Austria’s Der Standard newspaper reported yesterday.

‘Fall Apart’

Soros, who made $1 billion breaking the Bank of England’s defense of the pound in 1992, told Bloomberg on Jan. 28 he exited bets against sterling after it dropped to $1.40. The pound declined 0.5 percent to $1.4234 today for a 2.5 percent loss this month. It fell as low as $1.3503 on Jan. 23.

“There were some comments from George Soros saying that the euro might fall apart if they don’t get a solid plan together,” said Tony Morriss, a senior markets strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “We’re seeing the risk-aversion theme start to re-emerge. A lot of those things are weighing on some of these currencies.”

Europe’s inflation rate dropped to 1.4 percent in January, the lowest since at least October 2001, and the unemployment rate rose to 7.9 percent in December, the most since November 2006, according to Bloomberg News surveys of economists. The reports will be released at 11 a.m. in Luxembourg.

‘We Like Selling’

The yen strengthened 1.7 percent to 57.71 per Australian dollar. Japan’s current-account surplus makes the yen attractive to investors in times of financial turmoil because it makes the country less reliant on capital markets.

“We like selling dollar-yen,” analysts led by Jim McCormick, London-based global head of foreign exchange and local-markets strategy at Citigroup Inc., wrote in a research note yesterday. “Structural yen appreciation has yet to run its course as there remains scope for investors to unwind shorts.”

A short position is a bet an asset will decline.

Japan’s factory output fell a record 9.6 percent in December from the previous month, the Trade Ministry said today in Tokyo. The jobless rate climbed to 4.4 percent and household spending slid 4.6 percent, separate reports showed.

The Japanese currency will probably extend gains through the end of the country’s fiscal year on March 31 as exporters buy it to hedge revenue and money managers bring funds home amid the global slump, according to Barclays Capital.

Yen Appreciation

The yen also may advance as investors reduce so-called carry trades, where they borrow in the currency to invest in nations where interest rates exceed Japan’s 0.1 percent, said Toru Umemoto, chief currency strategist at Barclays, confirming a research note dated yesterday.

“We expect even further yen appreciation toward the Japanese fiscal year end in March, as both corporate hedging and investor repatriation flows support the currency,” Tokyo-based Umemoto said. “We believe the dollar will decline to 84 yen in three months.”

Honda Motor Co., Japan’s second-largest automaker, slashed today its full-year profit forecast 57 percent as vehicle demand in the U.S. plunged and the yen gained against the dollar, eroding the value of exports. The Nikkei 225 Stock Average slid 3.1 percent today.

Demand for the dollar may weaken on speculation a U.S. government report today will show the world’s biggest economy shrank at the fastest pace since 1982.

“From a fundamental perspective, the GDP report would be negative for the dollar and market sentiment,” said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore.

U.S. gross domestic product contracted at a 5.5 percent annual rate from October through December, according to a Bloomberg survey before the Commerce Department reports the figure in Washington.

The ICE’s Dollar Index, which tracks the greenback versus the euro, the yen, the pound, the Canadian dollar, the Swedish krona and the Swiss franc, rose 0.4 percent to 85.594, a third day of gains. It increased 5.8 percent this month, following a 6 percent advance last year.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.