Yen Rises as Decline in Asian Stocks Spurs Demand for Safety

By Yoshiaki Nohara and Ron Harui

Aug. 19 (Bloomberg) -- The yen rose against the dollar and euro as renewed concerns about the strength of the economic recovery spurred demand for Japan’s currency as a refuge.

The yen gained against all 16 major counterparts after Chinese shares led equities in the region lower and the Daily Telegraph cited Germany’s economic state secretary as saying the nation is preparing countermeasures for a new credit crunch early next year.

“Risk aversion, shown in a drop in Asian stocks, is causing the yen to be bought as a refuge,” said Masashi Hashimoto, a senior analyst at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s biggest publicly traded bank. “Signs China’s economy is faltering are weighing down on the global economic outlook.”

The yen rose to 132.81 per euro as of 7:54 a.m. in London from 133.84 yesterday in New York. Japan’s currency advanced to 94.20 per dollar from 94.69 after earlier gaining to 94.14, the highest level since July 29. The dollar traded at $1.4096 per euro from $1.4136.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slumped 4.6 percent. The MSCI Asia Pacific Index of regional shares fell 0.7 percent.

The Daily Telegraph reported German economic state secretary Hartmut Schauerte said companies with weak balance sheets may struggle to roll over loans that need to be paid back in coming months.

Europe Concern

European Central Bank council member Axel Weber said in an interview in the Sueddeutsche Zeitung newspaper on Aug. 17 that the ECB will “closely monitor” banks’ lending to firms while saying that there are no signs of a credit crunch in Germany.

“There are worries that the financial turmoil in Europe, including the U.K., may deepen again,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “Risk aversion is returning, causing buying of the yen and the dollar.”

The yen typically rises during times of financial turmoil because Japan’s trade surplus means the nation doesn’t have to rely on overseas lenders. The dollar benefits as the world’s main reserve currency.

South Korea’s won fell 0.7 percent to 1,255.85 per dollar from 1,246.65. A government report showed this month South Korea’s exports, which make up more than half of the economy, fell for a ninth month in July as demand from China, the U.S., and Japan weakened amid the global recession.

‘Clear Signs’

“On one hand, the economy is in better shape; on the other hand, you really need clear signs of future growth to push the currency stronger,” said Nizam Idris, a currency strategist at UBS AG in Singapore. The won will end this year at 1,250 and rise to 1,200 by the end of 2010, Idris said.

Gains in the dollar were limited after Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

The U.S. currency will drop the most against emerging- market counterparts, Curtis A. Mewbourne, a Pimco portfolio manager, wrote in a report on the company’s Web site. The greenback is losing its status as the world’s reserve currency, he said.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.

‘Monetary Medicine’

The U.S. must address the massive amounts of “monetary medicine” that have been put into the financial system and now pose threats to the world’s largest economy and the dollar, billionaire Warren Buffett wrote in a New York Times commentary yesterday.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, declined to 78.919 from 78.937 yesterday, after earlier touching 78.823, the lowest level this week.

The yen reversed earlier declines against the dollar and the euro amid speculation Japanese exporters bought the currency.

“There’s talk of keen yen-buying interest from exporters,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. “This is likely to put currencies such as the dollar under downward pressure.”

Japanese companies forecast the yen would average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.