Yen Falls as North Korea Holds Nuclear Test, Launches Missile

By Ron Harui and Gavin Finch

May 25 (Bloomberg) -- The yen fell from the near highest level in more than two months against the dollar after North Korea conducted its first nuclear test in three years and may have also launched a short-range missile, posing a threat to the region’s security.

The euro slipped versus the dollar and pared its gain against the pound after a report showed German business confidence in May rose less than economists forecast. New Zealand’s dollar declined versus the greenback on concern export revenue will drop after the U.S. increased subsidies for its dairy products.

“The missile test may have been conducted to escalate geopolitical risk,” said Akifumi Uchida, Tokyo-based deputy general manager of the marketing unit at Sumitomo Trust & Banking Co., Japan’s fifth-largest lender. “Japan also is geographically close to North Korea so this doesn’t augur well. The yen is being sold.”

The yen weakened to 94.97 per dollar by 10:12 a.m. in London, from 94.78 on April 22, after earlier rising as high as 95.21. Japan’s currency was little changed at 132.70 per euro. The euro traded at $1.3978, from $1.3998.

Currency markets may be volatile today due to thinner volumes with the U.S. and U.K. closed for holidays, said Besa Deda, chief economist at St. George Bank Ltd. in Sydney.

‘Self Defense’

North Korea said its underground nuclear test was part of measures to “bolster up its nuclear deterrent for self defense,” according to a statement from the official Korean Central News Agency. The test may complicate efforts to get North Korean leader Kim Jong Il to return to six-nation talks aimed at ending its nuclear weapons program.

“This is not a pretty picture, especially with this kind of external issue and the North’s stern stance,” said Kim Yong Tae, who helps oversee the equivalent of $1.2 billion in assets as a fund manager in Seoul at Yurie Asset Management Inc. “Investor sentiment will be negatively impacted and it’s going to be difficult to expect big gains” in the short-term.

North Korea also fired a short-range missile with a range of 130 kilometers (81 miles), South Korea’s Yonhap News reported, citing an unidentified diplomatic source.

The won was little changed at 1,248.82 per dollar at the close of trading in Seoul after earlier dropping as much as 1.7 percent. The MSCI World Index of shares fell 0.1 percent.

The yen slumped to an eight-month low against the dollar on Oct. 9, 2006, when the North Korea government said it had detonated its first nuclear bomb. A nuclear test is a threat to Japan, as Tokyo is 809 miles (1,295 kilometers) from North Korea’s capital of Pyongyang.

‘Grave Concern’

President Barack Obama said North Korea’s claim it conducted a nuclear test is of “grave concern,” according to an e-mailed statement from the White House. The test is in “blatant defiance“ of a United Nations Security Council resolution, Obama said.

Losses in the yen against the dollar may be tempered after credit-default swaps for Japan fell last week while those for the U.S. advanced, indicating an improving perception of the Asian nation’s credit quality relative to that of the world’s largest economy.

The cost to protect buyers of Japanese sovereign bonds for five years slipped to 45.97 on May 22, the lowest since Jan. 28, according to CMA DataVision. The price for the U.S. climbed to 42.51, the highest since April 28, from 37.75 the previous day.

Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a borrower fails to adhere to its debt agreements.

Credit Rating

Standard & Poor’s cut its outlook on the U.K.’s AAA credit rating on May 21, spurring speculation the same will happen to the U.S.’s grade. Pacific Investment Management Co.’s co-chief investment officer, Bill Gross, said last week the U.S. will “eventually” lose its top rating.

“Now that the safety of U.S. Treasuries has been called into question, money managers may try to more shift funds away from dollar-denominated assets,” said Hiroshi Maeba, deputy managing director of foreign-exchange trading in Tokyo at Nomura Securities Co., a unit of Japan’s biggest brokerage by assets.

The euro fell from near its highest level this year against the dollar after the Ifo institute said its German business climate index rose to 84.2, from 83.7 in April. Economists expected a gain to 85, the median of 39 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

Futures traders increased their bets to the most in 10 months that the euro will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed on May 22.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 12,250 on May 19, the largest since July 15, compared with net longs of 10,415 a week earlier. Futures are agreements to buy or sell assets at a set price and date.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net