Yen May Extend Drop as Stock Gains Spur Higher-Yield Demand

By Oliver Biggadike and Ye Xie

May 15 (Bloomberg) -- The yen may extend its drop against the euro as a gain in stocks encouraged investors to buy higher- yielding assets funded with Japan’s currency.

The dollar fell yesterday against the currencies of six major U.S. trading partners on reduced demand for the greenback’s safety. The Swiss franc was little changed against the euro after a central bank governing board member said policy makers want to prevent gains in the franc.

“The correlation between the equity market and the currency market is intact,” said Vassili Serebriakov, a strategist at Wells Fargo & Co. in New York. “A bounce in stocks means a weaker U.S. dollar and a weaker yen. The market is driven by hope.”

The euro traded at 130.70 yen at 6:38 a.m. in Tokyo, after gaining 0.8 percent yesterday. The dollar was at 95.85 yen following a 0.5 percent increase. The euro traded at $1.3636 after advancing 0.3 percent.

The Dollar Index, which the ICE uses to track the U.S. currency against the euro, yen, pound, franc, Canadian dollar and Swedish krona, fell 0.3 percent to 82.28 on reduced demand for safety after earlier rising as much as 0.4 percent.

Japan’s currency depreciated 2 percent to 45.99 against the Brazilian real and 1.5 percent to 7.25 versus Mexico’s peso as a drop in a gauge of currency volatility reduced the risk of losses in carry trades. JPMorgan Chase & Co.’s index of investor expectations for currency swings, known as implied volatility, fell to 14.38 percent yesterday, from 14.56 percent on May 13.

Carry Trades

Currency fluctuations can wipe out gains in carry trades, in which investors borrow funds in a country with low interest rates and buy assets where they expect to earn a higher return. Japan’s target lending rate of 0.1 percent compares with 10.25 percent in Brazil and 6 percent in Mexico.

The Standard & Poor’s 500 Index climbed 1 percent yesterday even after a U.S. government report showed first-time claims for unemployment insurance rose more than economists forecast.

“The fact that there’s no reaction in the market to negative news is a fairly robust signal that there are not a lot of people willing to be very bearish,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “It’s a positive signal for risk taking.”

Initial jobless claims increased to 637,000 in the seven days ended May 9 from 605,000 a week earlier, the Labor Department reported. The median forecast of 38 economists surveyed by Bloomberg was for an advance to 610,000.

Best Refuge

The yen may reverse this year’s decline against the dollar as it succeeds the greenback as the best refuge from the financial crisis, according to TD Securities Ltd.

The U.S. currency will probably fall to 92 yen by the end of the year as the link between the dollar and risk aversion deteriorates, wrote analysts led by Stephen Koukoulas, London- based head of global foreign exchange and fixed income at TD.

“The U.S. dollar’s cozy relationship with risk aversion is at risk itself,” the analysts wrote. The yen “has a chance at establishing its credentials as the refuge of choice,” they added.

The dollar may gain versus major counterparts as evidence of improvement in the global economy leads investors to buy U.S. stocks, according to UBS AG, the second-biggest currency trader.

“If the U.S. should lead the global economy out of the downturn, we would think that would actually favor the dollar,” said Brian Kim, a currency strategist at UBS in Stamford, Connecticut.

The franc traded at 1.5053 versus the euro yesterday after Thomas Jordan, a Swiss National Bank governing board member, said in an interview with the broadcaster SF Info that policy makers still aim to prevent a further appreciation of the currency to support the economy. The franc hasn’t strengthened beyond 1.5 per euro since March 12, when the central bank began buying foreign currencies to stem its gain.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net