Yen Climbs to Six-Week High on Swine Flu, Concern at U.S. Banks

By Yasuhiko Seki and Ron Harui

April 28 (Bloomberg) -- The yen advanced to a six-week high against the euro after the World Health Organization said the swine flu outbreak is no longer containable, triggering demand for safer assets.

Japan’s currency also gained for a fifth day versus the dollar after the Wall Street Journal reported that Bank of America Corp. and Citigroup Inc. are being told by regulators they need more capital, signaling the global financial crisis may be far from over. The South Korean won and Malaysian ringgit led Asian currencies lower on concern the swine flu will curb tourism and deepen the global recession.

“The spread of swine flu has sparked concern over global risk and strengthened risk aversion,” said Yousuke Hosokawa, a senior currency dealer in Tokyo at Chuo Mitsui Trust & Banking Co., a unit of Japan’s seventh-largest publicly traded bank. “Thus demand for the yen as a refuge will increase.”

Japan’s currency advanced to 124.56 per euro as of 7:44 a.m. in London, from 126.14 in New York yesterday. It earlier rose to 124.54, the strongest level since March 12. The yen climbed to 95.70 per dollar from 96.77, after reaching 95.68, the highest since March 23. Europe’s single currency declined to $1.3019 from $1.3036.

The won tumbled 1 percent to 1,356.95 per dollar, Indonesia’s rupiah dropped 0.7 percent to 10,875, and Malaysia’s ringgit weakened 0.7 percent to 3.6237.

Billions of Dollars

The yen rose for a third day against the euro after the Wall Street Journal said Bank of America’s capital shortfall comes to billions of dollars.

Both banks are objecting to the Federal Reserve’s preliminary report on the tests, and are expected to mount a detailed rebuttal, the Journal said, citing people familiar with the matter.

“The article shocked the market because it came after U.S. regulators gave an assurance that the vast majority of U.S. banks did not need a capital increase,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This is driving the yen higher across a broad front.”

Treasury Secretary Timothy Geithner indicated on April 21 that stress tests would show most of the 19 biggest U.S. banks have enough capital and said those needing more may convert government preference shares into common stock as well as seeking investments from private sources. Regulators are scheduled to release results of the tests on May 4.

A slide in Asian stocks also spurred demand for the yen. The MSCI Asia Pacific index of shares dropped 2 percent and the Nikkei 225 Stock Average slipped 2.7 percent.

Swine Flu

The yen advanced against all 16 of the most-traded currencies after the spread of swine flu beyond Mexico promoted the WHO to increase its global pandemic alert to the highest since it adopted the warning system in 2005. The number of cases in the U.S. has risen to 40 and Mexico’s toll of flu-related deaths reached 149. U.S. officials yesterday recommended citizens avoid nonessential travel to Mexico, and the European Union told travelers to avoid outbreak areas.

“The outbreak of the swine flu emerged at a bad time and threw cold water on investors who had just started to buy back riskier assets and currencies,” said Taisuke Tanaka, managing director and foreign-exchange strategist in Tokyo at Nomura Securities Co., a unit of Japan’s largest securities broker.

The euro climbed to a five-month high against the yen on April 6, having gained 11 percent between March 2 and April 6 on optimism the worst of the global financial turmoil may be over. The Australian dollar jumped nearly 19 percent against Japan’s currency between March 2 and April 13.

Mexican Peso

Mexico’s peso was little changed at 14.035 per dollar today in thin Asian trading from 14.0505 yesterday. It earlier fell to 14.1007, the weakest level since April 1. The peso slid against all of the other major currencies tracked by Bloomberg yesterday as the government shut schools until May 6 and close public events to contain swine flu.

The euro fell for a second day versus the dollar on speculation ECB policy makers will this week cut interest rates and signal they may pump additional money into the economy to push down borrowing costs and counter the recession.

The ECB stands “ready to use unconventional measures of quantitative easing” to increase the flow of credit, governing council member Ewald Nowotny said yesterday in New York. Executive board member Lorenzo Bini Smaghi will speak in Geneva today and fellow board member Juergen Stark will speak in Siegen, Germany tomorrow.

‘Downside Risk’

“The ECB is likely to take non-traditional monetary easing measures,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “There’s a large downside risk for the euro,” which may drop to $1.298 today, he said.

Investors in the past week added to bets the ECB will cut its 1.25 percent target lending rate at its next meeting on May 7. The implied yield on the three-month Euribor interest-rate futures contract for June delivery fell to 1.29 percent today from 1.335 percent a week ago.

The New Zealand dollar declined for a second day against the greenback and the yen on speculation the central bank will lower interest rates at a policy meeting this week.

There is a 40 percent chance of a half percentage point cut at the April 30 policy review, according to a Credit Suisse index based on swaps trading.

Benchmark rates are 3 percent in New Zealand and Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ assets.

“What will be important is how the bank talks about the long-end of the curve,” said Alex Sinton, a senior currency dealer at ANZ National Bank Ltd. in Auckland. “They are likely to make comments about keeping rates lower for longer.”

New Zealand’s dollar dropped 2.1 percent to 55.38 U.S. cents from yesterday in New York. It declined 3.1 percent to 53.02 yen.

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