Yen Advances, Paring Worst Month Since 1995, as Exporters Buy

By Theresa Barraclough and Ron Harui

Feb. 27 (Bloomberg) -- The yen gained, paring the worst monthly decline against the dollar since 1995 and the biggest drop versus the euro in eight years, on speculation exporters were taking advantage of its weakness to bring profits home.

Japan’s currency also strengthened for the first time in five days versus the greenback as a technical indicator showed its five-week slide was excessive. The euro fell, heading for a second month of losses versus the dollar, after the Financial Times said Iceland is developing a plan to restructure its bonds, suggesting the region’s financial turmoil is worsening.

“The yen has been falling throughout the entire week so there’s sentiment that it’s oversold,” said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., the world’s third-largest foreign-exchange trader. “We also may see Japanese purchases of the yen” as today is the last trading day of the month, he said.

The yen climbed 0.7 percent, its biggest gain in a week, to 97.80 against the dollar as of 7:07 a.m. in London from 98.52 yen late in New York yesterday. It touched 98.71 yesterday, the weakest since Nov. 10. The Japanese currency traded at 124.34 per euro from 125.52 yesterday, when it reached 126.08, the lowest since Jan. 8.

The euro traded at $1.2713 from $1.2744, and was at 89.06 British pence from 89.04 pence. The dollar climbed to $1.4275 against the pound, from $1.4317. Against the yen, Australia’s dollar declined 1.2 percent to 63.03 and New Zealand’s dollar dropped 1.2 percent to 49.48.

Krona, Zloty

Sweden’s krona fell to a record low of 11.4710 against the euro before trading at 11.4322. The krona headed for a 6.6 percent slump this month. Poland’s zloty dropped 0.3 percent to 4.7252 per euro and is poised for a 5.6 percent monthly loss.

The Dollar Index was set for a second monthly gain on optimism that U.S. President Barack Obama’s efforts to shore up the banking system will stem the credit crisis. Obama yesterday proposed a budget for as much as $750 billion of fresh aid for the financial industry.

“The Obama administration is taking policy steps more proactively than other governments,” said Masashi Kurabe, head of currency sales and trading in Hong Kong at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank by assets. “Sentiment for the dollar is strong.”

The dollar may rise to $1.2650 per euro today, he said.

The ICE’s Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, krona and Swiss franc, traded at 87.933 from 87.727 yesterday. It touched 88.254 on Feb. 18, the strongest level since a 2 1/2-year high reached on Nov. 21.

‘Yen Strength’

A technical chart traders use to predict price movements signaled the yen’s 4.6 percent decline this week versus the greenback was overdone. The dollar’s 14-day relative strength index versus the yen, a comparison of magnitudes of gains and losses, was 72.8 today, above the 70 level that signals the currency may have risen too quickly and is poised to decline.

“We’re moving into a world of yen strength, reflecting Japan’s strong external position and current-account surplus, and a very large net foreign-asset position,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG. “We’re not at a turning point for the yen, medium-term.”

The yen has dropped from January’s 13-year high against the dollar as government reports showed Japan is headed for its worst postwar recession. Industrial output declined 10 percent from a month earlier, the most on record, the Trade Ministry said today in Tokyo. Household spending fell 5.9 percent from a year earlier, the biggest drop in more than two years.

Financial Crisis

Europe’s single currency fell in the past month on concern the financial crisis in Eastern Europe will deepen. Standard & Poor’s cut the credit ratings of Ukraine and Latvia this week, damping demand for the euro.

The 16-nation currency also fell after the Financial Times reported today that Iceland is developing a plan to ask local owners of foreign assets to exchange their holdings for $3.6 billion of the country’s bonds owned by overseas investors. The newspaper, citing Finance Minister Steingrimur Sigfusson, said the move is aimed to ease concern capital outflow will quicken.

“We are bearish on the euro because of the turmoil in eastern Europe and the inflexibility of policy making,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader.

The European currency will weaken to $1.15 and 100 yen by the end of June, Yamamoto said.

To contact the reporters on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Ron Harui in Tokyo at rharui@bloomberg.net.