By Yasuhiko Seki and Ron Harui
March 12 (Bloomberg) -- The yen and the dollar strengthened against the euro on speculation the deepening global recession will increase demand for the two currencies as a refuge.
The yen and the greenback both gained versus higher- yielding currencies such as the Australian and New Zealand dollars after a Japanese report confirmed the world’s second biggest economy shrank at the fastest pace since 1974. The euro fell for the first time in three days against the dollar before a German report that economists say will show industrial production dropped for a fifth month, giving the European Central Bank more room to cut interest rates.
“The Japanese report was certainly bad, with some of the data suggesting the economy will keep deteriorating this quarter,” said Yuji Saito, head of the currency group in Tokyo at Societe Generale SA, France’s third-largest bank. “Investors are still risk-averse. This has led to buying of the yen.”
The yen climbed to 122.87 versus the euro as of 7:41 a.m. in London from 124.86 late yesterday in New York. The dollar rose to $1.2780 per euro from $1.2837. The yen advanced to 96.22 per dollar from 97.27.
Japan’s currency gained 2.6 percent to 62.08 against the Australian dollar and rose 1.6 percent to 49.16 versus the New Zealand dollar.
Economy Shrinks
The yen gained versus all 16 of the most-traded currencies after the Cabinet Office said Japan’s gross domestic product shrank an annualized 12.1 percent last quarter. Japanese factory output and exports slumped by records in January and Toyota Motor Corp., the nation’s biggest automaker, said it will cut production by more than half this quarter.
Demand for the safety of the yen and the dollar increased as Japan’s Nikkei 225 Stock Average fell 2.4 percent and the MSCI Asia Pacific Index of regional shares lost 1.1 percent. Stocks in the U.S. and Europe rose yesterday after JPMorgan Chase & Co. joined Citigroup Inc. in saying it was profitable in January and February.
“While recent news flows about U.S. banks may signal a potential bottoming out of the banking crisis, it is still premature to judge that the financial crisis is over,” said Shinya Furue, an economist at Norinchukin Research Institute Ltd. in Tokyo. “It is difficult to expect increased buying of stocks or rising capital inflows into emerging-market currencies.”
Sell Signals
The dollar may weaken to 95 yen and $1.33 per euro as momentum charts show “sell” signals for the greenback, according to Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.
The dollar may extend losses to 95 yen, a 38.2 percent Fibonacci retracement of its rally to the March 5 high of 99.68 from the January low of 87.13, said Osamu Takashima, chief foreign-exchange analyst in Tokyo at Bank of Tokyo-Mitsubishi.
Fibonacci analysis also indicates the dollar will drop to $1.33 per euro, Takashima wrote in a research note today.
New Zealand’s dollar ended two days of gains versus the yen after the central bank cut its benchmark rate by half a percentage point to 3 percent, weakening the appeal of the currency. New Zealand’s policy rate compares with 0.1 percent in Japan and a 3.25 percent in Australia.
‘Deteriorating Economy’
The euro fell for a second day against the yen on speculation a German report today will show industrial output declined in January.
The European Central Bank still has “room to move” after reducing the benchmark interest rate to 1.5 percent last week, ECB council member Erkki Liikanen said yesterday in Helsinki.
“Additional rate cuts by the ECB and weaker euro-region economic data could trigger the euro-yen to head lower,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group in Tokyo and a former Bank of Japan currency trader. The yen will rise to 120 per euro in coming months, he said.
Industrial output in Germany fell a seasonally adjusted 3 percent in January from the previous month, according to a Bloomberg News survey of economists. The Economy Ministry will release the report at 12 p.m. in Berlin.
Overseas Earnings
Losses in the dollar against the yen may be limited on speculation U.S. investors will bring back earnings from overseas assets on concern the global recession will worsen.
Sales at U.S. retailers dropped 0.5 percent in February, the seventh decline in eight months, a separate Bloomberg survey of economists showed before the Commerce Department report today.
“Retail sales are likely to signal a further deterioration of the U.S. economy, which may spark renewed repatriation of the dollar by U.S. investors,” said Takashi Matsumura, a Tokyo- based economist at Mizuho Research Institute, a unit of Japan’s second-largest banking group.
The Dollar Index, which the ICE uses to track the greenback performance against the currencies of six major U.S. trading partners, fell 0.2 percent to 87.713. The index touched 89.624 on March 4, the highest level since April 2006.
To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net
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