Dollar, Yen Rise as Economic View Encourages Demand for Safety

By Ye Xie and Lukanyo Mnyanda

July 6 (Bloomberg) -- The dollar and yen advanced against the euro on speculation the global economic recovery will be slow, encouraging demand for a refuge.

The U.S. and Japanese currencies rose as stocks around the world tumbled, with the MSCI World Index sliding as much as 0.9 percent. The dollar dropped versus the yen after Russian President Dmitry Medvedev said the world is too reliant on the U.S. currency and French Finance Minister Christine Lagarde called for increased global coordination of foreign exchange.

“We might be heading into an environment where the U.S. dollar can actually be much stronger than many people think,” said Hans-Guenter Redeker, head of global currency strategy at BNP Paribas SA in London, in an interview on Bloomberg Television. “You have to get a clear judgment how the economy is developing globally. The risk is pretty much skewed to the downside.”

The dollar advanced 0.6 percent to $1.3903 per euro at 8:39 a.m. in New York, from $1.3980 on July 3. The yen gained 1.4 percent to 132.44 per euro from 134.26 last week after earlier reaching 132.18, the strongest level since June 23. The yen appreciated 0.8 percent to 95.25 versus the dollar from 96.04.

The U.S. currency dropped against the yen after Russia and India said the global economy is too dependent on the U.S. currency and called for revisions to how $6.5 trillion in foreign-exchange reserves are managed. Their comments came as Group of Eight leaders prepared to meet in Italy this week.

‘Flawed’ System

“The dollar system, or the system based on the dollar and euro, have shown that they are flawed,” Medvedev said in an interview with the Italian newspaper Corriere della Sera, repeating his proposal for a new international reserve currency.

Authorities “must explore better coordination of exchange- rate policy,” Lagarde told reporters yesterday at a conference in Aix en Provence, France. India should diversify its $264.6 billion in foreign-exchange reserves and hold fewer dollars, Suresh Tendulkar, an economic adviser to Prime Minister Manmohan Singh, said in a July 3 interview.

Stocks around the world extended losses, with Europe’s Dow Jones Stoxx 600 Index sinking 1.6 percent. The MSCI Asia-Pacific Index of regional shares slipped 0.9 percent, and the Nikkei 225 Stock Average dropped 1.4 percent. Equities fell last week as the U.S. unemployment rate rose to 9.5 percent, a 26-year high.

Vice President Joe Biden said yesterday on the ABC news program “This Week” that the administration of President Barack Obama “misread the economy” when it forecast unemployment would peak at 8 percent if Congress enacted a $787 billion fiscal stimulus.

U.S. Jobs Report

“The aftereffects on risk appetite of the weak June U.S. employment report continue to be felt,” Steven Pearson, a foreign-exchange strategist at Bank of America Corp. in London, wrote in a report today. “Additionally, a larger-than-expected loss from a German banking group has served as a reminder that the financial outlook in Europe remains challenging.”

The euro fell against the dollar after IKB Deutsche Industriebank AG, Germany’s first victim of the subprime- mortgage crisis, said on July 4 it lost 580 million euros ($807 million) in the fiscal year ended March 31.

The 16-nation currency is unlikely to get support from fundamental data this week, with technical signals suggesting declines, according to Helaba Landesbank Hessen-Thueringen.

Outlook for Euro

If the euro drops below a range of $1.3950 to $1.3925, the next so-called support levels will be $1.3890, $1.3829 and $1.3806, Ralf Umlauf, head of floor research at Helaba in Frankfurt, wrote in a research report today.

Currency investors that use computer models to spot trends are suffering as markets are pulled in opposing directions. FX Concepts Inc., the world’s largest currency hedge fund, said it lost 5.4 percent in this year’s first five months. John W. Henry & Co.’s foreign-exchange fund told investors it lost 2 percent, after 2008’s 76 percent gain.

Deflationary pressure from the first global recession since World War II is being countered by the inflationary forces of record stimulus spending and currency printing across the globe.

Commerzbank AG is skeptical the yen will emerge as the “winner” against the dollar and euro because the economic slump in Japan is as severe as it is in Europe and the U.S.

“In the current situation, this makes particularly little sense,” a Commerzbank team led by Ulrich Leuchtmann in Frankfurt wrote today in a report. “The fundamental situation in Japan is at least as depressed as in the U.S. and in the euro zone. The green shoots in Japan are much more fragile.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net