Yen Falls as Signs Global Slump Easing Spurs Demand for Yield

By Yoshiaki Nohara and Ye Xie

June 19 (Bloomberg) -- The yen fell versus the Australian and New Zealand dollars for a second day as signs the global recession is easing spurred demand for higher-yielding assets.

Japan’s currency fell against all 16 major currencies after the Federal Reserve Bank of Philadelphia’s general economic index climbed yesterday to minus 2.2 from minus 22.6 in May, signaling the U.S. recession is bottoming out. The Conference Board’s index of U.S. leading economic indicators also rose more than forecast in May for the second straight month.

“We have seen some encouraging news about the global economy in the last 24 hours,” said Danica Hampton, a currency strategist in Wellington at Bank of New Zealand Ltd., the nation’s third-largest bank. “There’s been some relatively promising data out of the U.S. This is helping underpin growth to currencies like Japanese crosses.”

The yen fell to 61.69 against the New Zealand dollar as of 8:36 a.m. in Tokyo, from 61.56 yen yesterday in New York. The Australian dollar climbed to 77.22 yen from 77.02 yen. Japan’s currency traded at 96.58 per U.S. dollar from 96.47. It fell to 134.30 per euro from 134.17, declining for a third day.

The U.S. dollar rose versus the euro yesterday for the first time in three days after the British Bankers’ Association said it may allow more institutions to take part in the daily survey that sets the London interbank offered rate, the benchmark for more than $360 trillion of financial products around the world. Investors also abandoned bets that the euro would appreciate further after the common European currency failed to strengthen beyond $1.40.

Higher Libor?

“It would be a wider group of banks, so some ‘weaker’ ones who would submit higher rates, thus Libor would aggregate higher,” said Scott Ainsbury, a portfolio manager at New York- based FX Concepts Inc., the world’s largest currency hedge fund with about $12 billion in assets. “The market really has no conviction either way. So people are easy to get squeezed out.”

The dollar traded at $1.3906 per euro from $1.3900. It touched $1.4001 yesterday.

The Swiss franc weakened versus the euro yesterday on speculation the country’s central bank may sell the currency as it approaches the strongest level since March.

The franc slid 0.3 percent to 1.5103 per euro yesterday after rising as much as 0.3 percent to 1.5008. The currency hasn’t reached 1.50 since March 12, when the Swiss National Bank intervened. The SNB and the Basel-based Bank for International Settlements declined to comment on the currency’s turnaround.

Yield Differentials

Banks without a physical presence in London may apply to join the panel of members that contribute to the Libor-setting process, the BBA said yesterday. The BBA threatened in April 16 to ban members that deliberately understated rates before beginning a consultation process to discuss improvements.

“We think it’s the knock-on from the BBA report that’s boosting the dollar,” wrote Benedikt Germanier, a currency strategist in Stamford, Connecticut, at UBS AG, in a research note to clients yesterday. “The simple way to look at it is from a perspective of interest rate differentials moving in favor of the dollar.”

The yield advantage of two-year German bunds over the same- maturity U.S. note narrowed to 0.27 percentage point yesterday, the least since March.

“There is some focus on rising U.S. rates across the curve, and that is lifting the dollar,” aid Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second-biggest bank.

Treasuries fell yesterday, pushing yields higher, as reports showed the deepest recession in 50 years may be ending and the U.S. said note sales will increase to a record $104 billion next week. Yields on two-year notes increased 0.09 percentage point to 1.25 percent yesterday.

A “very large” euro sell-order hit the market immediately following the BBA news, said Greg Salvaggio, vice president of capital markets at currency-trading firm Tempus Consulting Inc. in Washington.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net.