Yen Climbs to Two-Week High on Concern U.S. Recession Deepening

By Ron Harui

April 15 (Bloomberg) -- The yen advanced to a two-week high against the dollar before U.S. reports that may show industrial output and manufacturing contracted, signaling the recession in the world’s largest economy is deepening.

Japan’s currency also climbed to the strongest in two weeks against the euro as Asian stocks fell, spurring investors to reduce holdings of higher-yielding assets. The euro may drop for a second day versus the dollar on concern a German report today will show wholesale prices dropped for a fifth month, supporting the case for the European Central Bank to cut interest rates.

“The markets are returning to reality from an exuberant state,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-biggest bank. “This is a correction, which is leading to some buying of the yen,” he said.

The yen rose to 98.66 against the dollar at 11:16 a.m. in Tokyo from 98.98 in New York yesterday. It earlier reached 98.58, the strongest level since April 2. Japan’s currency gained to 130.68 per euro from 131.25, and advanced to 70.82 per Australian dollar from 71.63.

The dollar traded at $1.3250 per euro from $1.3259, and was at $1.4893 versus the British pound from $1.4895.

The Nikkei 225 Stock Average and the MSCI Asia-Pacific Index of regional shares both declined 0.8 percent after the Standard & Poor’s 500 Index dropped 2 percent yesterday.

‘Negative’ Sentiment

“We are negative on equity sentiment over the short term and accordingly expect euro-dollar to trade lower,” wrote Ashley Davies, a Singapore-based currency strategist at UBS AG, Switzerland’s largest bank, in a research note today.

U.S. industrial output fell for a fifth month in March, dropping 0.9 percent, according to a Bloomberg News survey of economists before the Federal Reserve report today. The Fed Bank of New York’s Empire State index of manufacturing, also due today, was minus 35 in April, a 12th month of contraction, a separate Bloomberg survey showed.

The yen rose the most in four weeks against the dollar yesterday after the Commerce Department said U.S. retail sales fell 1.1 percent in March. The median forecast of economists surveyed by Bloomberg was for a 0.3 percent increase.

The euro may extend declines versus the dollar before Germany’s Federal Statistics Office releases its report on wholesale prices today. Prices fell 7.1 percent in March from a year earlier, after a 5.7 percent drop the previous month, according to a separate Bloomberg survey.

Higher Defaults

Europe’s single currency weakened yesterday as Standard & Poor’s said leveraged buyouts may help push corporate defaults in Europe to a record 14.7 percent this year.

Between 90 and 112 speculative-grade companies in western Europe rated by S&P may default this year, the New York-based company said, increasing an earlier estimate of as much as 11.1 percent. Defaults will be “materially higher” among companies purchased in LBOs, where target firms are loaded with acquisition debt, S&P said.

“The S&P report renews concern over possible defaults at financial institutions in Europe,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “It would be negative for the euro.” The 16-nation currency may weaken to $1.3180 and 130 yen today, he said.

The ECB cut its benchmark interest rate on April 2 by less than economists predicted, reducing it by a quarter-percentage point to 1.25 percent. Policy makers next meet May 7.

Ichimoku Cloud

The dollar may weaken toward the post-World War II low of 79.75 yen after climbing to about 103 yen in the coming weeks, according to Mizuho Financial Group Inc.

The level of 103 yen is the top of a so-called ichimoku cloud where sell orders may be triggered, causing the dollar to approach 79.75 yen, the postwar low set in April 1995, said Hiroyuki Tanaka, chief technical analyst at Mizuho Corporate Bank, a unit of Japan’s third-largest lender.

“The real game starts when dollar-yen hits the cloud,” Tokyo-based Tanaka said. The dollar’s path resembles the currency’s movements from March to August 2008 after the near- collapse of Bear Stearns Cos., he said.

The dollar tumbled to a 13-year low of 87.13 yen on Jan. 21 after the previous occasion the greenback failed to break through a cloud pattern. The dollar is entering the cloud for a second time after reaching a “double-bottom” of about 87.10 in December and January, according to Tanaka.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net