Yen Rises to Record as Economic Concern Spurs Demand for Haven

By Ye Xie and Bo Nielsen

Jan. 23 (Bloomberg) -- The yen strengthened to a record against the pound and near a seven-year high versus the euro as concern the global economic slowdown will deepen spurred investors to take refuge in Japan’s currency.

Sterling fell to a 23-year low versus the dollar after a report showed the U.K. economy shrank the most in the fourth quarter since 1980. The euro was poised for a fourth weekly loss against the dollar after Europe’s manufacturing and service industries contracted in January. The yen headed for the biggest weekly gain against the dollar in more than a month.

“The trend for a stronger yen won’t reverse until there’s a material change in global economic outlook,” said Adam Fazio, a currency strategist in New York at CIBC World Markets Inc., Canada’s fifth-biggest lender. “I am very bearish on the global economy, and I don’t see anything there to stop the dollar-yen from getting down to 80.” That level would be near the lowest since World War II.

The yen gained 1.5 percent to 121.62 versus the pound at 9:22 a.m. in New York, from 123.38 yesterday, after touching the record of 118.85. Japan’s currency advanced 1.3 percent to 114.07 per euro from 115.59 after reaching a seven-year high of 112.12 on Jan. 21. The yen traded at 88.85 per dollar after reaching 87.13 two days ago, the strongest since July 1995.

The pound weakened as much as 2.7 percent to $1.3503, the lowest level since 1985. The euro rose 0.2 percent to 93.85 pence. The 16-nation currency declined as much as 1.8 percent to a six-week low of $1.2765 before trading at $1.2791.

Yen Versus Pound

The yen was headed for a 9.9 percent weekly gain versus the pound. Japan’s currency advanced 5.5 percent versus the euro and 2.2 percent versus the dollar this week.

Russia’s ruble weakened 1.2 percent to 33.0891 per dollar today as the central bank widened its trading band in a move toward a free float. Investors and Russian citizens withdrew at least $278 billion from Russia since August, according to BNP Paribas SA data.

The yuan was little changed at 6.8380 per dollar after earlier slumping as much as 0.3 percent, according to the China Foreign Exchange Trade System. Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, said yesterday China is curbing appreciation of the currency. The yuan has strengthened 21 percent since a dollar peg was scrapped in 2005.

U.K. Bailout

Sterling lost 8.1 percent versus the dollar and 5 percent per euro this week as the U.K. government’s plan for a second bank bailout in three months raised concern the nation’s budget deficit will keep widening.

“The pound looks set to weaken further as risks surrounding the U.K. continue to ratchet higher,” Ned Rumpeltin, a London-based currency strategist at Morgan Stanley, wrote in a research note yesterday. “Concerns center on whether the country can attract the capital from external investors to finance its burgeoning fiscal deficit.”

Sterling will weaken to $1.30 and reach parity with the euro by the end of June, Morgan Stanley forecasts.

Britain’s gross domestic product fell 1.5 percent from the previous three months, the Office for National Statistics said today in London. Economists predicted a contraction of 1.2 percent, according to the median of 33 estimates in a Bloomberg survey. The economy has now shrunk for two consecutive quarters, the definition of a recession.

European Manufacturing

The euro fell versus the yen as Europe’s manufacturing and service industries contracted in January for an eighth month as the global recession curbed demand for exports and damped spending. A composite index of both industries based on a survey of purchasing managers by Markit Economics was at 38.5, compared with 38.2 in December, which was the lowest reading since the survey began in 1998. A reading below 50 indicates contraction.

“Selling pressure on the euro and the pound versus the yen is likely to persist,” said Masafumi Yamamoto, head of foreign- exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader.

The yen advanced against all of the major currencies this week, rising 7.5 percent to 46.16 against New Zealand’s dollar and 7 percent to 57.10 versus Australia’s dollar. Investors tend to purchase the yen in times of market turmoil because Japan has a current-account surplus. Japan’s benchmark interest rate of 0.1 percent compares with 4.25 percent in Australia and 5 percent in New Zealand.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the franc and Sweden’s krona, rose 1.3 percent today, after reaching 86.81, the highest level since Dec. 8.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net