Dollar, Yen Gain as Global Financial Losses Spur Haven Demand

By Ye Xie and Anchalee Worrachate

Feb. 20 (Bloomberg) -- The dollar and yen advanced against most of their major counterparts as concern losses at financial firms will deepen encouraged demand for havens.

Japan’s currency strengthened versus the euro for the first time in three days as global stocks tumbled. The euro was headed for its biggest weekly decline against the dollar in a month as European Central Bank President Jean-Claude Trichet said the financial crisis poses a serious challenge.

“The pattern has been consistent with risk-off trades,” said Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC, which has about $12 trillion in assets under custody. “The banking sector is front and center again. Our view is that the flows into the dollar will continue for a while as risk aversion persists.”

The dollar advanced 0.6 percent to $1.2593 per euro at 8:57 a.m. in New York, from $1.2674 yesterday. The yen appreciated 0.5 percent to 118.81 per euro from 119.37. Japan’s currency declined 0.1 percent to 94.33 per dollar from 94.20, weakening beyond 94 yen yesterday for the first time since Jan. 7.

The U.S. currency rose against the yen as the Labor Department said consumer prices increased 0.3 percent last month after dropping 0.8 percent in December.

The greenback was headed for a 2 percent gain versus the euro this week. The yen was poised for a weekly decline of 2.4 percent versus the dollar, the biggest drop since October. Japan’s currency was down 0.3 percent versus the euro this week.

Financial Turmoil

The yen is attractive in times of financial turmoil because Japan’s current-account surplus reduces the country’s reliance on overseas lenders.

Stocks dropped today, with the MSCI World Index falling for a ninth day. Standard & Poor’s 500 Index equity futures expiring in March slid 1.6 percent. JPMorgan Chase & Co. lost 3.6 percent after Meredith Whitney forecast banks won’t continue to pay their existing dividends.

“Some people are buying yen as a hedge against falling stocks,” said Neil Jones, head of hedge fund sales in London at Mizuho Corporate Bank.

The global credit crisis poses a “serious challenge” to the financial system and economic policy makers around the world, Trichet said today in a speech in Paris. The ECB will provide financial institutions with unlimited cash for as long as needed to help them through the crisis, he said.

‘Short’ on Euro

“We have gone short euro-dollar as a trade recommendation because prospects of rising growth risks up ahead point to the need for the ECB to apply more aggressive policy steps and investor-growth expectations remain at risk of being too optimistic,” Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut, wrote in a note yesterday.

Europe’s manufacturing and service industries unexpectedly contracted at a record pace in February, an index based on a survey of purchasing managers by Markit Economics showed. A composite index of both industries fell to 36.2, a record low. Economists forecast an increase to 38.5, according to the median of 13 estimates in a Bloomberg survey.

The euro headed for a weekly loss against the dollar after ECB council member Erkki Liikanen said policy makers haven’t used all the tools at their disposal to revive the region’s flagging economy.

ECB’s ‘Creativity’

“I’m convinced that we have not exhausted our creativity and our capacity to take initiatives,” Liikanen, who also heads the Bank of Finland, said in an interview with Finnish newspapers Turun Sanomat and Kaleva published today.

The ECB cut its benchmark interest rate by 2.25 percentage points to 2 percent since October. The bank may lower it again at its next meeting on March 5, Trichet and Liikanen said. Policy makers will reduce the rate to 1.5 percent, according to a Bloomberg News survey of economists.

The ECB’s main refinancing rate compares with 1 percent in the U.K., zero to 0.25 percent in the U.S. and 0.1 percent in Japan.

“The outlook for a narrowing interest-rate differential is negative for the euro,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management Ltd., a unit of France’s third-largest bank. “The euro may fall to below $1.25 in the near future.”

Germany’s Chancellor Angela Merkel said yesterday the region is “strong.” She declined to comment on whether Europe’s largest economy would step in to bail out any of the 16 euro members, saying she won’t speculate on the relative health of other countries.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net