Yen Climbs Toward Record High Versus Pound on U.K. Bank Concern

By Ron Harui

Jan. 22 (Bloomberg) -- The yen rose for a fourth day against the pound, approaching a record high, on speculation the deepening financial crisis will force the U.K. government to nationalize banks.

The yen also gained versus the euro and the dollar before a French report that economists say will show consumer spending fell last month, damping the appetite for higher-yielding assets funded in Japan’s currency. The pound approached a 23-year low versus the dollar before a U.K. government report tomorrow that may show the economy shrank the most since 1990, supporting the case for the Bank of England to cut interest rates next month.

“I’d dump sterling, and that will continue to exacerbate the short-term situation for the euro as well,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interbank broker. “The bad news out of European financials hasn’t finished yet and that will continue to weigh heavy on the currency and the economy as a whole.”

The yen rose to 123.59 against the pound as of 7:50 a.m. in London from 124.88 late in New York and yesterday’s all-time high of 119.42. Japan’s currency climbed to 115.83 per euro from 116.54 yesterday, when it touched 112.12, the strongest since March 2002. The yen gained to 89.13 a dollar from 89.49 yesterday after advancing to 87.13, the highest since July 1995.

The pound declined to $1.3866 from $1.3955 in New York. Against the euro, the pound dropped to 93.76 pence from 93.27 pence yesterday, when it touched 94.30 pence, the weakest level since Jan. 5.

Financial Crisis

Sterling lost 3.9 percent versus the dollar and 3.4 percent against the euro this week as the U.K. government’s plan for a second bank bailout in three months raised concern the financial crisis is deepening. Shares of Barclays Plc fell for a seventh day yesterday on concern the bank will take more writedowns and be nationalized.

The U.K.’s gross domestic product probably contracted 1.2 percent in the fourth quarter from the previous three months, according to a Bloomberg News survey of economists before tomorrow’s report from the Office for National Statistics.

“We see sterling and the euro continuing to deteriorate as the economic fundamentals undermine not only growth differentials against the U.S., but also we see the European Central Bank and the Bank of England continuing to cut interest rates,” Michael Woolfolk, a senior currency strategist in New York at Bank of New York Mellon Corp., said in an interview with Bloomberg Television.

The Bank of England will lower its benchmark rate by a half-percentage point to 1 percent at its Feb. 5 meeting, a separate Bloomberg survey shows. The chance the ECB will cut its 2 percent main rate by a quarter point the same day was 71 percent yesterday, up from 16 percent on Jan. 20, according to a Credit Suisse Group index.

‘Closely Monitoring’

Gains in the yen were tempered after Japan’s top currency official commented on the foreign-exchange markets.

“We are closely monitoring movements in the currency market,” Naoyuki Shinohara, vice finance minister for international affairs, told reporters in Tokyo today. Asked whether Japan will intervene to curb the yen’s advance, Shinohara said he had no comment.

Bank of Japan Governor Masaaki Shirakawa said in Tokyo today that the yen’s gains hurt Japanese exporters and the economy in the short term, while improving the nation’s terms of trade in the longer term.

Japan’s exports plunged a record 35 percent in December from a year earlier, a report from the Finance Ministry showed today. China’s economy expanded 6.8 percent last quarter from a year ago, the slowest pace in seven years, the nation’s statistics bureau said. South Korea’s economy shrank a larger- than-expected 5.6 percent in the fourth quarter, the Bank of Korea said.

Toyota, Sony

Exports from Japan to the U.S., China and Europe slumped the most ever as the global recession sapped demand for cars and electronics. Toyota Motor Corp., Sony Corp. and Honda Motor Co. are shedding thousands of workers and closing production lines as profits and sales dwindle.

China’s yuan traded at 6.8372 per dollar from 6.8378, while the Korean won fell 0.3 percent to 1,378. The yen was little changed after the Bank of Japan kept the benchmark rate at 0.1 percent in a unanimous vote today. The decision was forecast by economists surveyed by Bloomberg.

The last time Japan intervened in the currency markets on its own, it sold a record 20.4 trillion yen ($229 billion) in 2003, and 14.8 trillion yen in the first quarter of 2004. Central banks buy or sell currencies when they seek to influence exchange rates.

Manipulation

“The yen at current levels is really hurting Japan’s business,” John Richards, head debt-market strategist for the Asia-Pacific region at Royal Bank of Scotland Plc in Tokyo, said in an interview with Bloomberg Television. “Exchange-rate intervention might be the last arrow in their quiver.”

Timothy Geithner, U.S. President Barack Obama’s nominee for Treasury Secretary, said at his confirmation hearing yesterday that it’s important for America’s biggest trading partners to refrain from setting or manipulating exchange rates.

The euro approached a six-week low against the dollar on speculation the French government will say consumer spending dropped in December for the second time in three months.

“The euro-area economy is in the doldrums and may deteriorate further,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The bias for the euro is to the downside.”

Europe’s single currency may weaken to $1.2913 and 114 yen today, Soma said.

Spending by consumers, which accounts for about 15 percent of France’s economy, fell 0.2 percent in December from the previous month, according to a Bloomberg survey. Insee, the national statistics office, will release the report at 8:45 a.m. in Paris.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net.