Yen Gains for a Second Day Versus Euro as Asian Stocks Decline

By Yasuhiko Seki

June 9 (Bloomberg) -- The yen advanced for a second day against the euro and strengthened versus the dollar as declines in Asian stocks increased demand for the relative safety of Japan’s currency.

The yen also rose against 14 of the 16 most-active currencies after the Wall Street Journal reported the Obama administration wants Europeans to put their banks through more rigorous stress tests, raising concern about the strength of the banking system in the 16-nation region. South Korea’s won lead declines in Asian currencies on concern heightened tension with North Korea will deter investors.

“A downturn in stock prices -- the key barometer of risk appetite -- triggered buying back of the yen,” said Takao Yahata, senior manager of foreign exchange and financial- products trading in Tokyo at Mitsubishi UFJ Trust and Banking Corp., a unit of Japan’s largest publicly traded lender by assets. “Given that stock prices are looking top-heavy, we need to reassess the recent optimism about the global economy.”

The yen climbed to 136.54 per euro as of 7:44 a.m. in London from 136.89 in New York yesterday, when it gained 0.7 percent. It has still fallen 8.7 percent in the past three months. Japan’s currency rose to 98.13 per dollar from 98.49. The dollar fell $1.3915 per euro from $1.3900 yesterday when it advanced to $1.3806, the strongest level since May 28.

The MSCI Asia Pacific index of regional shares declined 0.7 percent after earlier rising as much as 0.4 percent. The Nikkei 225 Stock Average fell 0.8 percent.

European Banks

U.S. Treasury Secretary Timothy Geithner is likely to discuss stress tests for European banks at a meeting of finance ministers from the Group of Eight nations in Italy this week, the WSJ said. Standard & Poor’s yesterday cut Ireland’s credit rating for the second time this year, lowering it to AA from AA+, citing the nation’s rising bill for propping up its banks.

“The WSJ report came as an additional bad lead for the euro as it followed up renewed concerns about financial problems in neighboring countries, including the rating downgrade for Ireland,” said Yuichiro Harada, senior vice president of the foreign-exchange division in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest lender. “The currency may have to undergo some period of correction against the dollar, especially following the recent sharp run-up.”

The dollar earlier approached a one-week high against the euro as traders added to bets the Federal Reserve will increase its target lending rate this year as the world’s largest economy recovers. Nobel Prize-winning economist Paul Krugman said yesterday the U.S. economy will emerge from recession by September.

‘Stabilizing’

“I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer,” Krugman said in a lecture at the London School of Economics. “Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing.”

Traders see a 62 percent chance the Fed will raise its target rate by its November meeting, based on futures on the Chicago Board of Trade. The odds were 26 percent a week ago before the Labor Department said June 5 that U.S. payrolls fell by 345,000 last month, the smallest decrease in eight months.

“As Krugman signaled, people are becoming more confident about the prospects for the U.S. economy and interest rates there,” said Shoichi Handa, a senior currency dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc. “These positive perceptions will support capital flow back into dollar-denominated assets.”

Retail Sales

Sales at U.S. retailers increased in May for the first time in three months as demand for cars picked up, according to a Bloomberg News survey before the government report on June 11. Retail sales climbed 0.5 percent, after falling 0.4 percent the prior month, according to the survey

The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, fell to 80.669 from 80.909 yesterday when it reached the highest level since May 20. The index has risen 3 percent from this year’s low of 78.334 on June 2.

The Korean won dropped for a second day versus the dollar after the North handed out 12-year prison terms to two U.S. reporters accused of illegal entry. The two female journalists were detained near North Korea’s border with China in March while reporting for San Francisco-based Current TV, co-founded by former U.S. Vice President Al Gore.

‘Some Uneasiness’

There’s “some uneasiness linked to North Korea,” said Park Sang Bae, a currency dealer at Industrial Bank of Korea in Seoul. “The dollar will have a limited gain against the won for the day as exporters are willing to settle their positions on highs.”

The won declined 1 percent to 1,264.85 per dollar, extending its losses in the past month to 1.4 percent.

The dollar may rise to $1.30 per euro in the next three months as the U.S. economy shows signs of a recovery and concerns ease that overseas investors will reduce holdings of Treasuries, according to UBS AG.

Comments from Japanese, Indian and South Korean officials suggest that demand for Treasuries will remain strong, UBS said in the report yesterday. The dollar rose to a three-week high against the yen last week after the U.S. payrolls report.

“The sharp rally in the greenback after last week’s much better-than-expected payrolls numbers shows that dollar bears should be wary of selling the greenback at these historically low valuations,” UBS strategists including Mansoor Mohi-Uddin and Brian Kim said in the report.

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