By Theresa Barraclough
June 1 (Bloomberg) -- The yen rose for a second day against the dollar and the euro as speculation General Motors Corp. will file for bankruptcy today spurred demand for Japan’s currency as a refuge from the financial crisis.
The yen advanced versus 15 of the 16 of the most-traded currencies after people familiar with the matter said GM will make its announcement before 8 a.m. in New York, adding to signs the global recession is far from over. The euro weakened against the British pound on concern European Central Bank policy makers will signal this week they plan further steps to keep down borrowing costs, damping the appeal of the 16-nation currency.
“The problem is far from solved, even if GM is dissolved,” said Daisuke Uno, Tokyo-based chief bond and currency strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest bank by market value. “As the issue drags on, it’ll continue to be negative for the dollar and the yen is likely to benefit.”
The yen strengthened to 94.85 per dollar as of 12:14 p.m. in Tokyo, from 95.34 in New York last week, when it completed a 3.5 percent gain last month. Japan’s currency rose to 134.27 per euro from 134.96. The euro traded at $1.4155 from $1.4158, after gaining 7 percent last month, its biggest advance since December. Europe’s currency dropped to 87.16 pence from 87.46 last week.
The dollar may weaken to as low as 94.25 yen today, Sumitomo Mitsui’s Uno said.
Dollar Index
The Dollar Index fell the most in three weeks on concern the U.S. government will end with a 60 percent stake in GM, the world’s largest automaker for 77 years. The government is “a reluctant equity owner,” the Obama administration said yesterday in a statement.
The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, fell 1.6 percent to 79.142, the biggest decline since May 8.
The dollar dropped beyond $1.41 against the euro last week for the first time this year after the Congressional Budget Office projected the U.S. budget deficit would quadruple to about $1.8 trillion.
“The trend is for a decline in the dollar on the deteriorating quality of U.S. government debt,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “The market is very skeptical of the growing budget deficit.”
Treasury Secretary Timothy Geithner told China the U.S. wants to shrink its budget gap as soon as an economic recovery takes hold. The U.S. goal is a deficit of “roughly 3 percent” of gross domestic product, Geithner reaffirmed today in a speech to be delivered at Peking University in Beijing.
U.S. Debt Holders
South Korea’s National Pension Service, which had 236 trillion won ($189 billion) of assets at the end of 2008, said on May 29 it pared its allocation for U.S. Treasuries over the next five years. China, the largest foreign owner of Treasuries, said in March it was “worried” about its $767.9 billion investment.
The euro fell against 11 of the 16 most-traded currencies on speculation European policy makers meeting on June 4 will announce additional measures to spur growth in the region.
“There is the risk that the European Central Bank will expand its quantitative easing program,” which may be weighing on the euro, said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney.
ECB President Jean-Claude Trichet said last month the bank would buy 60 billion euros ($85 billion) of covered bonds. The Federal Reserve, the Bank of England and the Bank of Japan are already buying government and corporate bonds in a policy known as quantitative easing. The ECB will keep interest rates unchanged at 1 percent at the meeting, according to all but two economists surveyed by Bloomberg News.
China’s Manufacturing
The euro pared losses of as much as 0.4 percent against the dollar after China said its manufacturing expanded for a third month, adding to evidence the world’s third-largest economy is recovering and boosting demand for higher-yielding currencies.
“The China PMI data dispelled concerns the world’s third- largest economy may fail to drive a recovery in the global economy,” said Minoru Shioiri, senior foreign-exchange manager in Tokyo at Mitsubishi UFJ Securities Co., the brokerage unit of Japan’s biggest banking group. “The data triggered a buyback of the euro which had been sold prior to the release of a Chinese report on speculation there would be a poor result.”
The Purchasing Manager’s Index fell to a seasonally adjusted 53.1 in May from 53.5 in April, the Federation of Logistics and Purchasing said in Beijing. A reading above 50 indicates expansion.
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.
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