Yen Rises on Concern U.S. Slump Deepening, Swine Flu Spreading

By Yasuhiko Seki

April 27 (Bloomberg) -- The yen rose for a fourth day against the dollar after Lawrence Summers said the U.S. economy will keep shrinking and as the spread of swine flu boosted buying of Japan’s currency as a refuge amid the global recession.

“The economy will continue to decline,” with “sharp declines in employment for quite some time this year,” Summers, director of the White House National Economic Council, said yesterday on “Fox News Sunday.” The dollar weakened along with high-yielding currencies including those of Australia and New Zealand as the number of cases of swine flu in the U.S. and Mexico increased, leading to concerns about a decline in tourism.

“The market is returning to pessimism-driven trading,” said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s third-largest bank. “This means that the yen may be bought.”

The yen rose to 96.93 against the dollar as of 9:55 a.m. in Tokyo from 97.17 in New York on April 24. The Japanese currency advanced to 127.89 per euro from 128.66. The dollar traded at $1.3194 from $1.3242 last week.

Japan’s currency advanced 1.2 percent to 69.40 yen against Australia’s dollar and jumped 1.5 percent to 54.82 per New Zealand dollar.

The yen may strengthen to 90 per U.S. dollar by the middle of next month, Uno said.

Summers’ comments come before a government report that will show the world’s largest economy probably contracted 4.7 percent in the first quarter, after shrinking 6.3 percent in the final three months of 2008, according to the median forecast of 60 economists in a Bloomberg survey. The Commerce Department is due to release the data on April 29.

Swine Flu

President Barack Obama’s administration declared a public health emergency and released stockpiles of medicine because of a growing number of swine flu cases in the U.S. and Mexico. New illnesses were also confirmed in Canada, and suspected in Brazil and Europe and New Zealand.

“The outbreak of swine flu may have a psychological but negative impact on the dollar given the geographical proximity of the U.S. and Mexico,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-largest lender.

New Zealand’s dollar slid 1.1 percent to 56.58 U.S. cents amid concerns an outbreak may curb tourism, which makes up 10 percent of the local economy. Australia’s currency declined 1 percent to 71.63 U.S. cents from 72.32 cents in New York.

“There are plenty of reasons to sell the New Zealand dollar and on the margin the swine flu news doesn’t help,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. The currency will “struggle this week” and may fall toward 55 U.S. cents, she said.

ECB Rates Outlook

The euro may extend a third consecutive weekly loss against the yen on concern the European Central Bank will lower its policy interest rate at the next council meeting on May 7.

ECB President Jean-Claude Trichet will speak at a lunchtime conference on ‘Strategic Trends in Global Finance’ organized by Chatham House at the New York Federal Reserve Bank today. Vitor Constancio, a member of the ECB governing council, speaks at a conference on corporate governance and consumer interests in Lisbon.

Pumping In Liquidity

“As well as the expected cut, there is also a chance of the ECB introducing so-called quantitative monetary easing,” said Kengo Suzuki, a Tokyo-based currency strategist at Shinko Securities Co. “This prospect may weigh on the euro.”

Quantitative easing is when a central bank buys public or private debt to pump liquidity into the banking system.

European Central Bank council member Nout Wellink said the bank should consider lowering the benchmark interest rate below 1 percent, Market News International reported, citing an interview.

“This is part of a discussion we should have in the governing council,” Wellink told the news agency, in an interview conducted late yesterday in Washington. “Of course that should be discussed.”

Investors raised bets the ECB will reduce its 1.25 percent target lending rate at its May 7 meeting. The implied yield on the three-month Euribor interest-rate futures contract for June delivery fell to 1.295 percent on April 24 from 1.36 percent the previous day.

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