Yen Gains as China’s Slowing Growth Adds to Recession Concern

By Anchalee Worrachate and Ron Harui

April 16 (Bloomberg) -- The yen climbed to the highest level in two weeks against the euro after a government report showing China’s economy expanded at the slowest pace in almost a decade damped demand for higher-yielding assets.

The euro also slid versus the U.S. currency on concern a split among the region’s central bankers will hamper efforts to revive the economy. The yen rose against the dollar before U.S. reports today that may show home construction slowed and initial claims for jobless benefits increased. New Zealand’s dollar fell for a third day after the Organization for Economic Cooperation and Development said the country needs lower interest rates.

“Some people bought the yen on the back of the Chinese growth data which they find disappointing because it’s at the level that is unlikely to allow employment to grow,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of financial assets. “But longer term, I’m a yen bear. My general feeling is that the worst is perhaps behind us.”

The yen strengthened to 129.86 per euro as of 10:28 a.m. in London, from 131.44 in New York yesterday, after climbing to 129.68 yen, the highest level since March 31. Japan’s currency appreciated to 98.72 against the dollar, from 99.37. The euro declined to $1.3145, from $1.3227.

China’s Economy

China’s gross domestic product grew 6.1 percent in the first quarter from a year earlier, the weakest since the fourth quarter of 1999, the statistics bureau said today in Beijing. The median estimate of economists surveyed by Bloomberg was for 6.2 percent growth.

“There are lingering concerns that economies worldwide will take time to emerge from recession,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The yen may be bought. The dollar also is perceived as a ‘safe-haven’ currency and we may see some buying.”

New Zealand’s dollar weakened to 56.89 U.S. cents, from 58.12 cents, and dropped to 56.14 yen, from 57.73. Australia’s dollar fell 2.3 percent to 70.79 yen. China’s yuan traded at 6.8326 per dollar in Shanghai, from 6.8322 yesterday, according to the China Foreign Exchange Trade System.

U.S. Treasury Secretary Timothy Geithner yesterday refrained from labeling China as a currency manipulator in the department’s first semiannual report on foreign-exchange policies since he became secretary. He backtracked from an assertion he made during his confirmation hearings in January.

The yen was also bolstered as Asian stocks pared their advance. The Nikkei 225 Stock Average trimmed gains to 0.1 percent after earlier rising as much as 3.3 percent. The MSCI Asia-Pacific Index of regional shares increased 0.2 percent, down from as much as 2.2 percent earlier.

Euro Weakens

The euro fell for a third day against the dollar.

European Central Bank “fissures are highly damaging to sentiment,” currency strategists including London-based Gareth Berry at UBS AG, the world’s second-biggest foreign-exchange trader, said in a report today. “It appears that the key members of the Governing Council remain disconnected with market perception and this is already affecting the euro’s performance.”

ECB council member Axel Weber said yesterday the bank shouldn’t reduce its benchmark interest rate below 1 percent, from 1.25 percent now, putting him at odds with policy makers who say borrowing costs must fall to near zero. The OECD forecast March 31 that Europe’s economy will shrink 4.1 percent this year, compared with 4 percent in the U.S.

The euro stayed lower after a government report today showed industrial production sank 18.4 percent in February from a year earlier, the biggest decline since the data series began in 1986. Economists expected output to fall 18 percent.

Rate Bets

Investors raised bets the ECB will reduce its key interest rate at its May 7 meeting. The implied yield on the three-month Euribor interest-rate futures contract for June delivery fell to 1.26 percent today from 1.28 percent a week earlier.

The ECB will unveil a package of new measures next month to rescue the economy, Weber said in Hamburg yesterday.

“The euro may continue to be weighed down by prospects for further rate cuts and unconventional monetary easing policies,” Emmanuel Ng, a Singapore-based economist at Oversea-Chinese Banking Corp., wrote in a research note today.

Benchmark rates are 1.25 percent in the euro area and 3 percent in Australia and in New Zealand, making assets in Europe and the South Pacific nations attractive to international investors seeking higher returns. Japan’s benchmark is 0.1 percent and the U.S. rate is between zero and 0.25 percent.

OECD Report

New Zealand’s central bank should cut rates to as low as 2 percent to help the economy recover from a recession, the OECD said in its Economic Survey of New Zealand released today.

“The Reserve Bank still has room to go further in responding to deteriorating economic conditions,” the OECD said. “The much-improved inflation outlook allows scope for further easing.”

The pound fell 0.8 percent to $1.4873 today, snapping a three-day gain. The British currency rallied yesterday to $1.50 for the first time in three months, showing financial markets are growing more confident in Gordon Brown even as the U.K. prime minister is yet to benefit in the polls during Britain’s worst recession since 1984.

The currency rebounded 2 percent versus the dollar this year to as high as $1.5068 earlier today. It strengthened 8.4 percent against the euro in 2009. Polls show Brown’s Labour Party trailed the Conservatives, led by David Cameron, for the past year.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachte@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net