Yen Weakens Against Euro as Stock Gains Boost Demand for Yield

By Theresa Barraclough and Oliver Biggadike

June 5 (Bloomberg) -- The yen declined, heading for a third weekly loss against the euro, as Asian stocks advanced on speculation the worst of the financial crisis is over, spurring demand for higher-yielding currencies.

The euro strengthened for a fourth day versus the British pound after European Central Bank President Jean-Claude Trichet said yesterday the region’s economic performance will improve this year. The yen weakened against 11 of the 16 major currencies before a U.S. report today that may show employers cut fewer jobs last month, damping demand for the relative safety of the Japanese currency. The Australian and New Zealand dollars gained as commodity prices rose.

“What Trichet was saying fueled risk appetite in the markets,” said Kathy Lien, director of currency research at GFT Forex, an online currency-trading firm in New York. “I continue to expect the underperformance of the yen against all of the higher-yielding currencies.”

The yen fell to 137.32 per euro as of 1:42 p.m. in Tokyo, from 136.97 yesterday in New York, heading for a 1.8 percent drop this week. Japan’s currency slid to 96.76 per dollar from 96.58, set for a 1.5 percent weekly loss. The euro traded at $1.4191 from $1.4183. It climbed to $1.4338 June 3, the strongest this year. The euro rose to 88.06 pence from 87.67.

Australia’s dollar climbed 0.5 percent to 77.79 yen and gained 0.3 percent to 80.41 U.S. cents. New Zealand’s dollar climbed 0.4 percent to 61.50 yen. Australia benchmark interest rate is 3 percent and New Zealand’s is 2.5 percent, compared with 0.1 percent in Japan, luring investors to the South Pacific nation’s higher-yielding assets.

‘Weaker Yen’

The Nikkei 225 Stock Average rose 0.6 percent and the MSCI Asia Pacific Index of regional shares gained 0.4 percent. The Reuters/Jefferies CRB index of 19 commodities surged 2.6 percent yesterday, approaching a six-month high reached June 2.

“The market is already expecting some turnaround in the business cycle,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “A rise in crude and other commodities suggests a flow of money into risk assets, leading to a weaker yen.”

The yen may decline to 150 per euro by year-end, Kato said.

The dollar gained for a third day versus the yen before today’s U.S. payrolls report. U.S. employers cut 520,000 jobs in May, down from 539,000 positions the prior month, according to a Bloomberg survey of economists before the Labor Department releases the figure.

The jobless rate in the world’s largest economy still rose to a 25-year high of 9.2 percent last month, another U.S. report will show, according to a separate Bloomberg survey.

‘Better Day’

“We are looking at a better day in the market” for higher-yielding currencies, said Tony Morriss , a senior markets strategist at Australia & New Zealand Banking Group Ltd. in Sydney. Even a bad jobless rate in the U.S. won’t wipe out the overall optimism of the global economy, he said.

The euro rose versus 11 of the 16 most-traded currencies today after the ECB kept its benchmark rate at an all-time low of 1 percent yesterday, after cutting it at its previous meeting.

“The current rates are appropriate,” ECB President Trichet said in Frankfurt. “For the remainder of the year economic activity will decline with much less negative rates.”

The central bank plans to start buying covered bonds next month to hold down borrowing costs and complete the 60 billion euro ($85.1 billion) program in June 2010, Trichet said.

Dollar Index

The euro gained 6 percent against the dollar since the ECB last met on May 7 as economic reports added to evidence the most acute phase of the recession passed, damping demand for the U.S. currency as a refuge.

The Dollar Index was little changed today after falling yesterday on speculation nations are considering alternatives to the world’s main reserve currency.

Russian President Dmitry Medvedev reiterated concern about the dollar’s role as the world’s reserve currency and said an alternative may help to create a new global financial architecture, in an interview with Kommersant newspaper published today.

The dollar “is not in a spectacular position, let’s be frank, and its prospects cause various questions as do the prospects for the global currency system,” Medvedev, who today hosts an international economic forum in St. Petersburg, said, according to Moscow-based Kommersant.

The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, was at 79.422 from 79.357 yesterday, when it declined 0.2 percent.

‘Bad to Worse’

The British pound may weaken to less than $1.60 per dollar and below 155 yen as increasing concern about the future of Prime Minister Gordon Brown’s cabinet spurs investors away from the currency, according to Calyon.

“The U.K. political situation is rapidly moving from bad to worse, which is acting as a major drag on the British pound,” Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong, wrote in a research report today.

Work and Pensions Secretary James Purnell yesterday resigned, the fifth minister to quite the U.K. Cabinet in a week, and called on Brown to follow suit.

The pound weakened 0.3 percent to $1.6122 and fell 0.2 percent to 155.98 yen.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Oliver Biggadike in New York at obiggadike@bloomberg.net.