Yen Falls to Two-Week Low Against Euro on Higher-Yield Demand

By Yasuhiko Seki

May 1 (Bloomberg) -- The yen slid to a two-week low against the euro and weakened against the dollar on speculation a report today will show U.S. manufacturing contracted at a slower pace, encouraging investors to buy higher-yielding assets.

Japan’s yen also halted a three-week rally versus both currencies after the nation’s consumer prices fell for the first time in more than a year in March, backing the case for the central bank to keep interest rates at 0.1 percent. The dollar advanced after President Barack Obama said the U.S. and Canada will commit more money to Chrysler LLC, which filed for bankruptcy, as it forms an alliance with Fiat SpA.

“The market is more optimistic about Chrysler’s bankruptcy and is looking toward the re-engineering of the company,” said Satoru Ogasawara, a foreign-exchange analyst and economist in Tokyo at Credit Suisse Group AG, the second-largest Swiss bank. “Data this morning signaled that Japanese consumer spending will remain weak for some time” and caused the yen to fall.

The yen slid to 131.08 per euro at 12:20 p.m. in Tokyo, from 130.52 in New York yesterday. It earlier fell to 131.51, the weakest since April 16. The yen was at 98.93 against the dollar from 98.63, after dropping to 99.16, the lowest since April 20. The dollar was at $1.3251 per euro from $1.3230.

Australia’s dollar rose to 72.60 U.S. cents from 72.56 cents, heading for its ninth weekly advance versus the greenback, after Asian stocks last month posted their biggest rally since at least 1999.

U.S. Manufacturing

The Institute for Supply Management’s manufacturing index in the U.S. rose for a fourth straight month to 38.4 in April, from 36.3 in the previous month, according to the median forecast of 66 economists surveyed by Bloomberg. A reading above 50 indicates expansion. The report is due at 10 a.m. in New York.

“Optimism that the worst of the global recession is over is re-emerging thanks to an improvement in macroeconomic data,” said Akitsugu Bandou, senior economist in Tokyo at Okasan Securities Co. “This view will weaken the yen and buoy demand for higher-yielding currencies.”

The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, rose 0.1 percent to 84.735.

Demand for the yen weakened after the government said Japan’s prices excluding fresh food fell 0.1 percent in March from a year earlier after being unchanged in February. The jobless rate rose to 4.8 percent from 4.4 percent in February, the statistics bureau said today in Tokyo.

Aussie Versus Yen

The Bank of Japan said yesterday the economy will shrink 3.1 percent this fiscal year and prices will tumble as the recession takes a toll on spending. The BOJ kept its benchmark interest rate unchanged yesterday in a unanimous decision.

Japan’s currency gained 0.5 percent in April against the euro and 0.4 percent versus the dollar. The greenback increased 0.2 percent against the euro last month.

Australia’s dollar headed for its first weekly gain against the yen in three weeks on speculation Japanese investors will pour funds into higher-yielding currencies.

“When there is optimism, one bet which may work is to buy the Australian dollar as the bottoming-out of global demand may buoy exports of resources and commodity products from Australia,” said Takeshi Makita, an economist in Tokyo at Japan Research Institute Ltd., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest banking group. “But when there is no clarity about the sustainability of such an improvement, such operations may result in a short-term move.”

Swine Flu

Higher interest rates in New Zealand and Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attract investors to the nations’ assets. Australia’s central bank probably will maintain benchmark borrowing costs at a 49-year low of 3 percent when policy makers meet May 5, according to the median forecast of a Bloomberg News survey.

In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher rates. The risk is that market moves can erase those profits.

The yen fell against all of the 16 most-active currencies after Japan’s Health Minister Yoichi Masuzoe said a 17-year-old boy may be the country’s first swine-flu case.

The teenager, a high-school student from Yokohama, near Tokyo, visited the western Canadian province of British Columbia from April 10 to 25, according to public broadcaster NHK, which televised the news conference by Masuzoe this morning.

“I’m a bit worried about the spread of the flu to Japan,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This may weaken the allure of the yen.”

Golden Week

Bridgestone Corp., the world’s largest tiremaker, will shut four factories in Mexico until May 5 in response to the outbreak, said Mari Tainaka, a company spokeswoman. Mexico’s government had ordered the company to shut the factories, she said.

The yen’s losses were tempered by speculation investors will cut “short” positions on the currency before Japan enters the so-called Golden Week holidays, said Yousuke Hosokawa, a senior currency dealer in Tokyo at Chuo Mitsui Trust and Banking Co., a unit of Japan’s seventh-largest publicly traded bank. A short trade is a bet that an asset’s value will decline.

Japan’s financial markets will be closed from May 4 to May 6.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net