Yen Rises to Strongest Versus Dollar Since 1995 on Haven Demand

By Ye Xie

Jan. 24 (Bloomberg) -- The yen advanced to the strongest level against the dollar since 1995 and 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 and dropped to a record against the yen as Britain’s plan for a second bank bailout in three months raised concern the nation’s budget deficit will widen. The Federal Reserve is forecast on Jan. 28 to maintain a range of zero to 0.25 percent for the target lending rate after saying in December that it would focus on buying debt to boost liquidity.

“It’s a broad-based flight to quality,” said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank Ltd. in New York. “Nothing has changed in terms of yen strength going forward.”

The yen gained 2.2 percent this week to 88.75 per dollar yesterday from 90.72 on Jan. 16. It reached 87.13 on Jan. 21, the strongest level since July 1995. Japan’s currency appreciated 4.5 percent to 115.12 per euro from 120.37 a week earlier after touching 112.12 on Jan. 21, the strongest level since March 2002. The euro fell 2.2 percent against the dollar to $1.2975.

China’s commerce ministry said the country isn’t curbing appreciation of the yuan to promote exports after Timothy Geithner, President Barack Obama’s nominee for Treasury secretary, told lawmakers this week that China is “manipulating its currency.” He made the remarks in written responses to questions from Senate Finance Committee members that were posted on the panel’s Web site.

China’s Yuan

China’s yuan was little changed at 6.8380 per dollar this week, according to the China Foreign Exchange Trade System. It gained 21 percent since a dollar peg was scrapped in 2005.

Russia’s ruble weakened 1 percent to 32.8590 per dollar this week as the central bank widened its trading band in a move toward a free float. The ruble has lost 29 percent in the past six months.

The yen advanced against all of the major currencies this week, rising 5.7 percent to 46.92 against New Zealand’s dollar and 5.2 percent to 58.05 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.

“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,” said Adam Fazio, a currency strategist at CIBC World Markets Inc. in New York. That level would be near the lowest since World War II.

Yen’s Gain

Japan’s currency gained 9.8 percent versus the Aussie in January, after appreciating 54 percent last year. The yen advanced 12 percent this month versus the kiwi, as New Zealand’s currency is known, following a 65 percent rally in 2008.

The yen is “overvalued significantly,” according to Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC, which has $15.3 trillion in assets under custody.

The amount wagered in long yen-dollar positions tracked by State Street over the past six months is higher than in 90 percent of six-month periods since 1997, Blake said.

The rally “won’t last unless the market continues to be under extreme risk aversion,” he said.

Sterling dropped 8 percent versus the yen this week and reached a record low of 118.85 yesterday. The pound depreciated 6.3 percent against the dollar to $1.3809, touching $1.3503 yesterday, the lowest level since September 1985.

U.K. Bank Rescue

Prime Minister Gordon Brown announced on Jan. 20 a plan to support U.K. financial institutions and boost the government’s stake in Royal Bank of Scotland Group Plc, raising concern the country’s banking crisis may be deepening.

Britain’s gross domestic product fell 1.5 percent during the fourth quarter, the Office for National Statistics said yesterday in London. That’s the biggest decline since 1980. The economy has now shrunk for two consecutive quarters, matching the definition of a recession.

“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 on Jan. 22. Sterling will weaken to $1.30 and reach parity with the euro by the end of June, Morgan Stanley forecasts.

The euro had a fourth weekly decline against the dollar, the longest losing stretch since August, as Europe’s manufacturing and service industries contracted this month.

European Factories

A composite index of European manufacturing and service industries based on a survey of purchasing managers by Markit Economics was at 38.5 in January, compared with 38.2 in December, which was the lowest since the survey began in 1998. A reading below 50 indicates contraction.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, touched 86.81 yesterday, the highest level since Dec. 8, as investors sought safety in the world’s reserve currency. It gained 1.7 percent this week.

The Fed last month cut its target lending rate to as low as zero for the first time and shifted its focus to the amount and type of debt it buys, seeking to revive credit and end the longest slump in a quarter-century.

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