Yen, Dollar Weaken as Stock Gains Boost Higher-Yield Currencies

By Yasuhiko Seki and Ron Harui

March 10 (Bloomberg) -- The yen and the dollar weakened on speculation gains in Asian stocks and U.S. equity futures fueled demand for higher-yielding assets.

The euro approached a two-month high against Japan’s currency on expectations European investors will bring home overseas earnings before the end of the first quarter. South Korea’s won gained the most in almost two months against the dollar as overseas investors bought more of the nation’s shares than they sold. The Australian and New Zealand dollars advanced as Asian stocks rose.

“We’ve got a lot of green on the board in Asian equities and that’s good for risk-taking appetite,” said Sean Callow, a senior currency strategist at Westpac Banking Corp., Australia’s biggest lender by market value. “It would certainly fit into the yen weakness that’s been one of the biggest stories over the past month. That also works to the detriment of the dollar.”

The yen dropped to 125.42 versus the euro as of 7:51 a.m. in London from 124.65 late in New York yesterday. The dollar dropped to $1.2706 per euro from $1.2611. The U.S. currency declined to 98.69 yen from 98.84 yen.

Japan’s currency fell 1 percent to 63.04 versus the Australian dollar, and weakened 0.7 percent to 49.06 against the New Zealand dollar from late in New York yesterday.

The yen slid against 14 of the 16 most actively traded currencies after a Cabinet Office report today showed the leading index of business conditions fell to 77.1 in January from 80 in December, below the consensus forecast of 77.4 in a Bloomberg News survey. The coincident index, which shows current economic activity, dropped to 89.6 from 92.4.

Machine Orders

Japanese machinery orders slumped 4.8 percent in January from December following a record decline of 16.7 percent in the last quarter of 2008 from the previous three months, according to a separate Bloomberg survey of economists before a Cabinet Office report tomorrow.

“The incoming data is likely to illustrate the vulnerability of the Japanese economy,” said Takashi Matsumura, a Tokyo-based economist at Mizuho Research Institute Ltd., a unit of Japan’s second-largest banking group. “The weak data will be yen-negative.”

The Dollar Index, which the ICE uses to track the U.S. currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 0.4 percent to 88.659. The index touched 89.624 on March 4, the highest level since April 2006.

The MSCI Asia Pacific excluding Japan rose 2 percent and Standard & Poor’s 500 Index futures climbed 0.9 percent.

‘Repatriating Funds’

The euro pared this year’s loss to 9.2 percent against the dollar on speculation European investors bought the currency to repatriate income from abroad as they close their books before March 31.

“Investors in central and eastern Europe appear to be repatriating funds,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co., a unit of Japan’s largest brokerage.

The euro may strengthen to $1.27 and 126.50 yen this week, according to Amikura.

U.K. Chancellor of the Exchequer Alistair Darling called on the European Union to bolster a facility used to support nations facing financial difficulties, saying the EU must do more to help former communist states.

“Our priority must be to support those countries most at risk from the aftershock of the global financial crisis, starting with those on our own doorstep in Europe,” Darling wrote in a letter published in the Guardian newspaper today.

The Korean won rose 2.5 percent to 1,511.50 per dollar, according to Seoul Money Brokerage Services Ltd. The currency has dropped 17 percent this year, after sliding 26 percent in 2008, and touched 1,597 on March 6, the lowest level since 1998.

‘Offshore Players’

“There are offshore players who are selling dollars for the won after an excessive overshoot in the exchange rate in recent weeks,” said Roh Sang Chil, a currency dealer with Kookmin Bank in Seoul. “Rising stocks are lending support to the currency market. From April, we’ll see the overall situation improving.”

Daily momentum charts such as the stochastic oscillator and moving average convergence/divergence are showing “buy” signals for the euro, said Masashi Hashimoto, a currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.

“If the euro can break the 21-day moving average of $1.2726, which has capped its gains recently, we may want to be bullish on the prospect of the single currency,” he said.

Yuan Policy

Asian currencies may be supported after a researcher affiliated with China’s top planning agency said the nation should let the yuan rise 3 percent against the dollar in 2009 to deter capital outflows and help the country make overseas acquisitions.

“A weaker currency will prompt massive amounts of foreign capital to flee the country,” said Wang Jian, secretary general of the China Society of Macroeconomics, a Beijing-based research institute under the National Development and Reform Commission that advises the government. “Foreign consumers still won’t have enough money to buy.”

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.