Yen Weakens as Australian Rate Decision Boosts Yield Demand

By Ye Xie and Kim-Mai Cutler

March 3 (Bloomberg) -- The yen weakened against all of the major currencies as Australia’s Reserve Bank unexpectedly left its target lending rate unchanged for the first time in seven months, boosting demand for higher-yielding assets.

Japan’s currency declined for the first time in three days versus the euro as stocks climbed. The dollar erased its drop as pending home resales in the U.S. fell in January more than economists forecast and Federal Reserve Chairman Ben S. Bernanke said aid to the banking system may need to be expanded.

“The decision by the RBA to hold rates steady and a lack of corporate-loss announcements encouraged a less risk- restrictive environment,” said Jack Spitz, managing director of foreign exchange at National Bank in Toronto. “There are momentum traders buying the Aussie and the New Zealand dollar.”

The U.S. currency traded at $1.2577 per euro at 10:12 a.m. in New York, from $1.2578 yesterday, after earlier dropping 0.3 percent. The yen lost 1 percent to 123.78 per euro from 122.58. The dollar gained 1 percent to 98.40 yen from 97.45.

The Dollar Index, which the ICE uses to track the greenback versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, was little changed after earlier declining as much as 0.7 percent. It reached 89.003 yesterday, the highest since April 2006, as investors sought safety in the world’s reserve currency after insurer American International Group Inc. posted a record $61.7 billion loss in the fourth quarter and got more government support.

South Korea’s Won

South Korea’s won advanced from near an 11-year low against the dollar on speculation policy makers intervened to stem the currency’s slump. It gained 1.2 percent to 1,552.15 per dollar after declining yesterday to 1,595.50, the weakest since 1997.

The yen also slid today as public broadcaster NHK reported that Toyota Motor Corp., forecasting its first loss in 59 years, may seek about $2 billion in government loans.

Japan’s currency weakened 7.9 percent versus the dollar in February, its worst month since August 1995, on concern the deepening recession in Japan undermined the currency as a haven.

The yen is 16 percent “overvalued” against the dollar, which “sits uncomfortably with the challenges facing the Japanese economy and the deterioration in the external balance,” wrote Fiona Lake, a Hong Kong-based analyst at Goldman Sachs Group Inc., in a research note today. “The headwinds facing the Japanese economy warrant an even weaker yen.”

Australian Dollar

Australia’s currency gained as much as 2.6 percent to 64.63 U.S. cents, the biggest intraday advance since Feb. 6, and rose 3.2 percent to 63.36 yen after the Reserve Bank left the overnight cash target at 3.25 percent. Only four of 18 economists surveyed by Bloomberg News forecast the decision, with the rest expecting a cut of at least a quarter-percentage point. The Aussie advanced from a one-month low of 62.87 cents.

New Zealand’s dollar climbed 0.8 percent to 49.65 cents after reaching 49.13 yesterday, the lowest level since November 2002. It added 2.2 percent to 48.56 yen.

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

“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.”

Real’s Gain

The Brazilian real and South African rand gained on investors’ increased demand for higher-yielding, emerging-market assets. The real rose 1.3 percent to 2.4169 per dollar after reaching 2.4501 yesterday, the weakest level since Dec. 19. The rand advanced 0.9 percent to 10.4354 per dollar today.

Benchmark rates are 0.1 percent in Japan and as low as zero in the U.S., compared with 3.5 percent in New Zealand, 10.5 percent in South Africa and 2 percent in South Korea. The difference encourages investors to borrow in Japan and the U.S. and invest in higher-yielding assets elsewhere.

The European Central bank will lower the main refinancing rate on March 5 by a half-percentage point to 1.5 percent, and the Bank of England will halve its target to 0.5 percent, according to the median forecasts of economists surveyed by Bloomberg News.

Canada’s dollar slid 0.2 percent to C$1.2931 versus the greenback after the Bank of Canada cut its target lending rate by a half-percentage point to a record low of 0.5 percent. Fifteen of 23 economists surveyed by Bloomberg News predicted today’s reduction.

U.S. Housing

An index of pending home resales decreased 7.7 percent in January after a 4.8 percent gain in the previous month, the National Association of Realtors reported today. The median forecast of 32 economists surveyed by Bloomberg News was for a 3.5 percent drop

Policy makers may need to expand aid to the banking system beyond the $700 billion already approved and take other measures even at the cost of soaring fiscal deficits, Bernanke said today in testimony prepared for the Senate Budget Committee.

The Standard & Poor’s 500 Index advanced 1.3 percent after closing yesterday at the lowest level since October 1996.

To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net