By Bo Nielsen and Anchalee Worrachate
April 15 (Bloomberg) -- The yen and the dollar rose as UBS AG Chief Executive Officer Oswald Gruebel said markets are “extremely unstable,” stoking concern the global recession is deepening.
The Japanese and U.S. currencies climbed against the Australian and New Zealand dollars and the Norwegian krone. UBS, Switzerland’s biggest bank, said it will cut another 7,500 jobs. The euro recovered losses after European Central Bank council member Axel Weber said cutting the benchmark interest rate below 1 percent risks bringing lending between banks to a standstill.
“We have seen spectacular rallies across several asset classes, while evidence of an improvement on the real economic front is lagging and clearly investors remain cautious,” said Michael Klawitter, a currency strategist with Dresdner Kleinwort in Frankfurt. “Things will get worse before they get better and that’s benefiting the yen at the moment”
The yen strengthened to 71.49 per Australian dollar as of 6:36 a.m. in New York, from 71.63 yesterday. It reached 129.93 per euro earlier, the highest level since April 1, before trading little changed at 131.43. Japan’s currency was at 98.96 against the dollar, from 98.98. It earlier touched 98.15, the strongest since March 31.
Investors reduced holdings of higher-yielding assets before U.S. data that may add to evidence the economy may not recover anytime soon.
Industrial Output
U.S. industrial output declined 0.9 percent last month, according to a Bloomberg News survey 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.
Nine of the 10 most-traded Asian currencies outside Japan weakened after China said foreign direct investment fell a sixth month.
“The yen has benefited from increasing concerns over the sustainability of the recent rally in risk assets,” Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi UFJ Ltd., wrote in a note today. “Any further disappointment will benefit both the yen and the dollar. The scope for both significant yen and dollar gains driven by a reversal in risk sentiment is fairly limited.”
The dollar depreciated to $1.3291 per euro, from $1.3259. The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, was little changed at 84.61.
Shares Decline
The MSCI World Index of shares fell for the second day and the Nikkei 225 Stock Average declined 1.1 percent. The MSCI benchmark gained 20 percent since the beginning of March. Futures on the Standard & Poor’s 500 Index were little changed.
“We are negative on equity sentiment over the short term and accordingly, expect euro-dollar to trade lower,” Ashley Davies, a Singapore-based currency strategist at UBS, said in a research note today.
Foreign direct investment into China dropped 9.5 percent to $8.4 billion in March from a year earlier, the Commerce Ministry said in Beijing today. That compares with a 15.8 percent decline in February.
Volatility implied by one-month Australian dollar options against the yen rose to 29.9 percent from 29.2 percent yesterday, indicating a greater risk of exchange-rate fluctuations that can erode profit on so-called carry trades.
Carry Trades
In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates. The risk is market moves can erase those profits. The benchmark interest rate is 0.1 percent in Japan, compared with 3 percent in Australia and in New Zealand.
The yen rose the most in four weeks against the dollar yesterday after the Commerce Department said U.S. retail sales unexpectedly fell 1.1 percent in March, after rising a revised 0.3 percent the previous month.
“Sooner rather than later pessimism will return to the market,” said Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital, the world’s third-largest foreign-exchange trader. “The yen will be the beneficiary.”
The euro weakened yesterday as Standard & Poor’s said leveraged buyouts may help push corporate defaults in Europe to a record 14.7 percent this year.
“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 euro may weaken to $1.3180 and 130 yen today, he said.
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, 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: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net
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