Yen Strengthens as Stock Drop Boosts Currency’s Haven Appeal

By Ye Xie and Bo Nielsen

Jan. 8 (Bloomberg) -- The yen rose to the strongest level against the euro in more than two weeks and advanced versus the dollar as a global drop in stocks prompted investors to seek the perceived safety of Japanese assets.

The currency gained versus the Australian dollar before tomorrow’s U.S. payroll report, which may show the economic decline deepened. The pound appreciated versus the euro and the dollar after the Bank of England cut its benchmark interest rate today to an all-time low of 1.5 percent to limit the fallout from Britain’s first recession in 17 years.

“It’s all about risk aversion and capital preservation,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “In an environment where capital is scarce, countries with strong positions in capital inflows are benefiting. Japan is one of them.”

The yen gained 1.1 percent to 125.05 per euro at 8:56 a.m. in New York, from 126.42 yesterday. It touched 124.11, the strongest level since Dec. 22. The yen appreciated 1.7 percent to 91.14 per dollar from 92.65. The euro increased 0.6 percent to $1.3721 from $1.3644. UBS recommends its clients sell the euro versus the dollar as the European economy deteriorates, according to Kim.

Sterling strengthened 1.1 percent to $1.5266 from $1.5095 after the BOE lowered the main rate by a half-percentage point, the fourth cut since the global coordinated emergency reductions on Oct. 8. Against the euro, the British currency appreciated to 89.37 pence from 90.36 pence.

‘Something Extreme’

“It would take something extreme in terms of rate cuts to weaken sterling at the moment,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG, the world’s largest foreign-exchange trader. “That’s what the market was expecting.”

The yen rose 2.9 percent to 64.15 per Australian dollar on speculation investors sold higher-yielding assets and bought back the Japanese currency.

U.S. stock-index futures slipped following a 3 percent drop in the Standard & Poor’s Index yesterday. The Dow Jones STOXX 600 Index of European shares fell 0.8 percent in a second daily decline. Asian stock markets fell.

“New Year optimism appears to have run into the brick wall of deteriorating economic conditions,” wrote London-based Steven Pearson, a foreign-exchange strategist at Merrill Lynch & Co., the investment bank acquired by Bank of America Corp.

Euro Versus Franc

The euro fell 0.5 percent to 1.4945 against the Swiss franc. European Central Bank President Jean-Claude Trichet sees a “significant” worsening in the economic environment, Institutional Investor magazine cited him as saying in an interview conducted at the end of 2008 and published yesterday. “It’s clear that we have had a significant deterioration of the real economy,” Trichet told the magazine.

Data today showed the European jobless rate rose to 7.8 percent in November from 7.7 percent the prior month and the region’s confidence in the economic outlook fell to the lowest level on record, adding to pressure on the ECB to cut interest rates when it meets on Jan. 15.

Some investors bought the yen today for safety on speculation Israel’s war in the Middle East is widening, according to Gerrard Katz, head of foreign-exchange trading in Hong Kong at Standard Chartered Plc, the U.K. bank that gets most of its profit from Asia.

“This is a combination of problems in the Middle East and risk aversion,” said Katz. “It’s natural for the yen to strengthen, because it’s viewed as safe.”

Payroll Report

A report of U.S. non-farm payrolls tomorrow will probably show they fell to 515,000 in December, according to a Bloomberg News survey of analysts before Labor Department figures due tomorrow. The unemployment rate likely jumped to 7 percent, the highest level since 1993.

The number of Americans filing first-time claims for unemployment benefits unexpectedly dropped last week, while total benefit rolls surged to a 26-year high, signaling companies got a jump on firings last year as the recession deepened.

Initial jobless claims fell to 467,000 in the week that ended Jan. 3, the lowest level in almost three months, the Labor Department said today in Washington. The total number of people receiving benefits rose a week earlier to 4.6 million, the most since 1982.

President-elect Barack Obama will give more details in a speech today on his $775 billion, two-year economic stimulus plan.

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