Euro Rises, Heads for Second Monthly Gain, on Recovery Optimism

By Yasuhiko Seki and Ron Harui

Aug. 28 (Bloomberg) -- The euro rose, headed for its first two-month advance against the dollar since March 2008, on growing evidence Europe is emerging from its worst recession.

The 16-nation currency gained for an eighth day versus the pound, its longest streak in four years, before a European report forecast to show business and consumer confidence rose to the highest level in 10 months. The yen fell against 15 of 16 major counterparts after Japanese government reports showed unemployment rose to a record and consumer prices slumped. Japan’s opposition party may win elections on Aug. 30, polls show, halting the ruling party’s half-century grip on power.

“The euro-zone economies look like they’re starting to recover,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The euro is easy to buy, given higher interest rates there than in the U.S. and Japan.”

The euro rose to $1.4355 as of 1:14 p.m. in Tokyo from $1.4341 in New York yesterday, when it reached $1.4406, the highest level since Aug. 7. The currency has advanced 0.7 percent this month. It climbed to 134.53 yen from 134.14 yen, and strengthened to 88.24 British pence from 88.07 pence.

The yen weakened to 93.71 per dollar from 93.52 yesterday. It declined to 64.34 versus New Zealand’s dollar from 64.28 yesterday, and fell to 78.63 per Australian dollar from 78.48.

Executive, Consumer Sentiment

Europe’s single currency strengthened as an index of executive and consumer sentiment in the 16-nation region climbed to 78 in August, the highest since October, from 76 in July, according to a Bloomberg News survey of economists. The European Commission will release the data today in Brussels.

European Central Bank board member Mario Draghi said on Aug. 26 that the global economy appears to be recovering from its first recession since World War II even though “strong uncertainties” remain.

The yen may decline for a second-straight week versus the New Zealand dollar on speculation investors sold the Japanese currency to buy higher-yielding assets.

Japan’s jobless rate rose to 5.7 percent in July, eclipsing the previous worst of 5.5 percent seen in April 2003, the statistics bureau said today in Tokyo. Consumer prices excluding fresh food declined 2.2 percent in July from a year earlier after dropping 1.7 percent in the previous month, the statistics bureau also said today.

“The markets seem to be perceiving the data as a negative for the safe-haven status of the currency,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This is probably why the yen is being sold.”

U.S. Confidence

The benchmark interest rate is 0.1 percent in Japan and as low as zero in the U.S., compared with 2.5 percent in New Zealand and 3 percent in Australia, attracting investors to the South Pacific nations’ assets.

The dollar may head for a third weekly loss versus the Swiss franc before a U.S. report forecast to show a gauge of consumer confidence rose this month, sparking an increase in risk appetite.

A Bloomberg News survey of economists showed that the Reuters/University of Michigan gauge on Aug. 28 is projected to rise. The barometer of confidence among U.S. consumers probably rose to 64.0 in August from 63.2 in the previous month.

The dollar was at 1.0588 francs, down from 1.0594 francs yesterday, holding near the year-to-date low of 1.0531 touched on Aug. 27.

‘Gradually Improving’

“The overall picture that the global economy is gradually improving remains intact,” said Tomokazu Matsufuji, a dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc. “The safe-haven currencies are likely to weaken against higher-yielding ones as risk sentiment is on the mend.”

Adding to signs the recession is easing, the U.S. economy, the world’s largest, contracted less than economists forecast as companies reduced inventories, spending started to climb and profits grew, a Commerce Department report said yesterday.

Gross domestic product shrank 1 percent in the three months ended in June, matching the initial estimate on July 31. The contraction was less than the 1.5 percent median forecast in a Bloomberg News survey of 75 economists.

The main opposition Democratic Party of Japan may win more than 320 of the 480 seats at the election Aug. 30, the Asahi newspaper reported yesterday. Prime Minister Taro Aso dissolved parliament on July 21, triggering the general election.

“The DPJ lacks policies which can re-invigorate the corporate sector as it focuses on households,” said Kazuto Uchida, chief economist in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s biggest banking group. “The limited prospect of an acceleration in growth expectations may prevent foreign investors from buying into Japanese assets.”

Spending Policies

DPJ President Yukio Hatoyama and his party have pledged cash for child care and an abolition of highway tolls among their spending policies.

A convincing victory by the DPJ may turn out be positive for the yen in the short term, according to Koji Fukaya, a senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world’s largest currency trader.

“The DPJ won’t block the Bank of Japan from hiking interest rates when the right time comes, and it will be reluctant to intervene currency markets,” he said.

The Bank of Japan, which gained independence from the government in 1998, has kept its benchmark overnight lending rate at 0.1 percent since December. The rate has remained at 0.5 percent or lower since 1995.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.