Yen, Dollar Gain as Havens on Bets Bank Bailout to Fall Short

By Molly Seltzer and Whitney Kisling

Feb. 12 (Bloomberg) -- The yen and dollar rose against all of the other major currencies as global stocks dropped on concern the U.S. financial recovery plan and the economic stimulus will fall short, boosting haven demand.

The euro declined for a third day against the yen after a report showed industrial output in the 16-nation region fell in December by the most on record, giving the central bank more room to cut interest rates. The pound slid against the euro and dollar on concern the recession in the U.K. is deepening.

“All the stimulus in the world is not going to arrest the economic downturn unless we have some sort of stabilization in the banking system,” said Omer Esiner, a senior analyst in Washington at Ruesch International Inc., a currency trading company. “That’s helping safe-haven assets.”

The yen appreciated 1.3 percent to 115.18 per euro at 9:24 a.m. in New York, from 116.66 yesterday. The dollar gained 1 percent to $1.2783 per euro from $1.2906. The U.S. currency fell 0.2 percent to 90.18 yen from 90.40.

The dollar pared its loss against the yen after the Commerce Department reported today that U.S. retail sales increased 1 percent in January, halting a record six-month slide. The median forecast of 72 economists surveyed by Bloomberg News was for a 0.8 percent decrease.

“The overwhelming complexion of the data is that the economy is weak, not strong, so the retail number is the exception to the rule,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “It’s not typical of what’s going on.”

Geithner on Rescue

Treasury Secretary Timothy Geithner, speaking yesterday before the Senate Budget Committee, defended his strategy of taking time to work out the details of a plan to shore up the financial industry.

“I completely understand the desire for details and commitments,” he said. “But we’re going to do this carefully.”

U.S. lawmakers agreed yesterday on a $789 billion economic stimulus plan, trimming the measure from more than $800 billion. Congress will send the stimulus package to President Barack Obama as early as today, Senate Majority Leader Harry Reid said.

The MSCI World Index dropped for a third day, losing 0.7 percent, while Europe’s Dow Jones Stoxx 600 Index declined 1.2 percent. Standard & Poor’s 500 Index futures fell 1 percent.

“Risk appetite remains shaken,” Steven Pearson, a strategist in London at Merrill Lynch & Co., wrote in a note today.

Weaker Sterling

Sterling fell 0.9 percent to $1.4266 and 0.6 percent to 90.18 pence per euro as the spread between two- and 10-year government debt reached the widest since at least 1992. Bank of England Governor Mervyn King said yesterday the economy is in a “deep recession” that may prompt policy makers to keep cutting interest rates and pump money into the economy.

The euro weakened as the European Union’s statistics office said today in Luxembourg that industrial output in the region fell 12 percent from a year earlier. The decline was larger than the 9.5 percent drop forecast by economists in a Bloomberg survey and the biggest since the data series began in 1986.

The European Central Bank cut its inflation outlook in 2010 to 1.6 percent from 2 percent, stoking speculation policy makers will lower its main refinancing rate to a record. The bank also reduced its 2010 growth outlook to 0.6 percent from 1.4 percent.

“The report may heighten expectations for an ECB rate reduction,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker.

ECB’s Rate

Investors added to bets the ECB will lower borrowing costs from 2 percent at its March 5 meeting. The yield on the three- month Euribor interest rate futures contract due in March fell to 1.70 percent today from 1.715 percent yesterday.

ECB council member Erkki Liikanen said policy makers may cut the rate at their March meeting, Helsinki-based financial news Web site Taloussanomat.fi reported.

“Inflation developments and expectations are in line with our price stability target,” Liikanen said. “This gives us room to continue to take measures, and it’s possible we’ll move in the next meeting.”

The Group of Seven industrialized nations will meet this weekend in Rome to discuss measures to stabilize the financial system. Finance ministers and central bankers are likely to seek assurances the global recession won’t spark a wave of protectionism that deepens the slump, according to Marco Annunziata, chief economist at UniCredit MIB in London.

The G-7 may reinstate a call for China to increase the flexibility of its currency, Makoto Utsumi, a former top currency official at Japan’s Finance Ministry, said last week. “The yuan may be singled out,” he said.

To contact the reporters on this story: Molly Seltzer in New York at mseltzer4@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net