Dollar, Yen Weaken as RBA Rate Decision Boosts Demand for Yield

By Ron Harui and Theresa Barraclough

March 3 (Bloomberg) -- The dollar and the yen fell after Australia’s central bank unexpectedly halted the country’s most aggressive round of interest-rate cuts, boosting demand for higher-yielding assets.

The U.S. and Japanese currencies also snapped two days of gains versus the euro as Asian shares pared losses and U.S. stock futures climbed, increasing confidence among investors to resume so-called carry trades. Currencies of economies with higher relative interest rates, such as Australia, New Zealand, China and the Philippines, all strengthened.

“Investors have no alternative but to look abroad because their domestic rates aren’t high,” said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co., Japan’s fifth-largest bank. “Recently, some appear to be buying assets in Asia as the performance of those assets is relatively good.”

The dollar declined to $1.2654 per euro as of 6:31 a.m. in London from $1.2578 late in New York yesterday. The yen dropped to 123.41 per euro from 122.58. The U.S. currency traded at 97.54 yen from 97.45 yen.

Australia’s currency rose 1.8 percent to 64.12 U.S. cents and advanced 1.9 percent to 62.54 yen from late in New York yesterday. New Zealand’s dollar climbed 1.1 percent to 49.79 cents and added 1.2 percent to 48.59 yen. Against Japan’s currency, China’s renminbi rose 0.1 percent to 14.251 and the Philippine peso climbed 0.4 percent to 1.999.

Buying Yuan

Selling Japan’s currency today for the Chinese yuan may provide a total return of 3 percent this year, based on Bloomberg calculations using analyst exchange-rate forecasts and the difference between the two nations’ interest rates.

The Reserve Bank of Australia left the overnight cash target at 3.25 percent at today’s meeting. Only four of 18 economists surveyed by Bloomberg News forecast the decision, with the remainder expecting a reduction.

Demand for higher-yielding currencies was also supported by speculation a government report tomorrow will show Australia’s gross domestic product rose 0.2 percent last quarter from the prior three months.

“In the short-term, the Aussie dollar should sustain this bounce because people will quickly turn to the GDP number tomorrow,” said Sean Callow, a Sydney-based currency strategist at Westpac, Australia’s fourth-largest bank by assets. “It looks like it will be a positive number, which in global terms is unique.”

Benchmark rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 3.25 percent in Australia and 3.5 percent in New Zealand, encouraging investors to borrow in Japan and the U.S. and invest in higher-yielding assets elsewhere. China’s interest rate is at 5.31 percent and the Philippines benchmark is 5 percent.

Worst is Over

The U.S. currency weakened versus 14 of the 16 major currencies after the World Bank said the worst of the global financial crisis has passed, reducing demand for the greenback as a shelter from the turmoil.

“The period of acute financial crisis is behind us,” Andrew Burns, lead economist at the World Bank’s development prospects group, said today at the Australian Bureau of Agricultural and Resource Economics conference in Canberra. “Now we are moving forward under weaker conditions but growth will come back and we expect that toward the end of this year.”

Gains in the euro may be limited before a government report later today that economists say will show Germany wholesale prices slid 2 percent in January, the sixth consecutive month of declines. Europe is being dragged into its deepest recession since World War II as the global financial crisis derails purchases of cars and factory machinery, forcing companies to reduce output and cut jobs.

‘Aggressive Stance’

“The euro-zone economy remains under considerable stress and the additional decline in inflation will enable the ECB to apply a more aggressive stance on monetary policy,” wrote analysts led by Mansoor Mohi-Uddin, chief currency strategist in Zurich at UBS AG, in a research note yesterday. “We expect the euro to remain under pressure, in particular versus the dollar.”

Investors boosted bets the European Central Bank will lower its 2 percent benchmark rate at its March 5 meeting. The yield on the three-month Euribor interest-rate futures contract due in March was at 1.655 percent today from 1.7 percent a week ago.

The dollar also declined for the first time in three days against the euro before U.S. reports this week on housing and employment that may add to signs the world’s largest economy is sinking deeper into recession.

“The market is starting to realize again that the situation in the U.S. is far more deeply rooted than in Japan,” said Daisuke Uno, chief bond and currency strategist at Sumitomo Mitsui Banking Corp. in Tokyo. “The focus is now on all the bad news, especially with the jobs data coming up, which will increase dollar selling pressure.”

Deepening Recession

The dollar also fell before a National Association of Realtors report that may show its index of pending home sales dropped 3.5 percent in January after a 6.3 percent increase in December, according to a Bloomberg News survey. Companies in the U.S. cut an estimated 630,000 jobs in February, economists surveyed by Bloomberg predict the ADP Employer Services gauge will show tomorrow.

The Dollar Index, which tracks the greenback versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined to 88.615 from 88.940 yesterday when it reached 89.003, the strongest since April 2006.

The MSCI Asia Pacific Index for regional shares pared losses, declining 0.2 percent, after earlier sliding as much as 1.7 percent. Futures on the Standard & Poor’s 500 Index advanced 1.2 percent.

U.S. Slump

The world’s largest economy will likely shrink at an annual pace of 7 percent this quarter and 3 percent next quarter, Edward McKelvey, a New York-based senior economist at Goldman Sachs Group Inc., wrote in a research note yesterday. The forecasts compare with previous predictions for declines of 4.5 percent and 1 percent, respectively.

“The risks to our expectations for near-term U.S. economic activity swung sharply to the downside last week,” McKelvey wrote, citing factors such as the Commerce Department’s report on Feb. 27 that showed the economy contracted at a larger-than- expected annual pace of 6.2 percent last quarter.

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