By Lukanyo Mnyanda and Yasuhiko Seki
Sept. 14 (Bloomberg) -- The yen rose for a third day against the euro on speculation a trade dispute between the U.S. and China will slow the global economic recovery, boosting demand for the Japanese currency as a refuge.
The yen climbed the most against the New Zealand dollar and South African rand after China said it was investigating alleged dumping of American auto and chicken products. The pound snapped a four-day gain against the dollar as Ernst & Young LLC’s Item Club said the U.K. housing-market slump will resume next year. New Zealand’s dollar dropped after a report showed retail sales unexpectedly slid in July.
“Whenever a story of this magnitude comes out, it’s an excuse to take risk off the table,” said Neil Mellor, a currency strategist in London at BNY Mellon Corp., the world’s biggest custodian of financial assets. “The yen is the principal beneficiary.”
The yen strengthened to 131.94 per euro as of 9:50 a.m. in London, from 132.17 in New York on Sept. 11. The Japanese currency was at 90.74 against the dollar, from 90.71, after earlier appreciating to 90.21, the highest level since Feb. 12.
The dollar rose to $1.4547 per euro, from $1.4571 at the end of last week, when it reached $1.4634, the weakest level this year. The U.S. currency appreciated the most against the New Zealand dollar and the Mexican peso.
Asian and European stocks fell, with the Dow Jones Stoxx 600 Index sliding 1.4 percent. The MSCI Asia Pacific Index dropped 1.8 percent, with futures on the Standard & Poor’s 500 Index retreating 1 percent.
‘Unfair Trade Practices’
Chinese industries complain that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site yesterday. The dumping investigation relates to poultry alone, a spokesman said in Beijing today. The ministry didn’t specify the value of imports of the products.
Rising protectionism may hamper world trade and undermine the global economy’s recovery from recession, the European Central Bank said last week. The U.S. placed tariffs starting at 35 percent on $1.8 billion of tire imports from China, backing a United Steelworkers union complaint against the second-largest U.S. trading partner.
“The dollar is back in demand as the market gets worried that trade relationships between the U.S. and China are souring,” analysts led by Hans-Guenter Redeker, London-based head of currency strategy at BNP Paribas SA, wrote in a client report today. “Today, we expect equity and commodity markets to come under selling pressure.”
Risk Aversion
The dollar benefits from risk aversion because it’s the world’s main reserve currency. Japan’s currency typically rises during times of financial turmoil as the nation’s trade surplus makes it less reliant on overseas lenders.
The yen’s strength doesn’t make sense, said Jim O’Neill, head of global economic research at Goldman Sachs Group Inc.
“If I look at the underlying fundamentals, virtually everything that drove the yen stronger in its floating-exchange history isn’t there anymore,” he said in an interview on Bloomberg Television in London today. “The yen doesn’t deserve to be anywhere near this, and I don’t see it lasting.”
The pound declined from the highest level in more than a month, sliding 0.7 percent to $1.6533. It lost 0.5 percent to 87.93 pence per euro. U.K. house prices will stagnate for two years after “dipping” in the first half of 2010, the Item Club, which uses the same economic model as the Treasury, said in a report today.
Retail Sales
The so-called kiwi slid by the most in two weeks as retail sales in New Zealand declined for a second month, dropping 0.5 percent from June. That compares with the median forecast for a 0.4 percent gain, according to a Bloomberg survey of economists.
New Zealand’s dollar fell to 69.79 U.S. cents, from 70.74 cents last week. It bought 63.29 yen, from 64.17 yen.
The dollar may pare gains on speculation the Federal Reserve Board won’t rush to exit its policy of pumping liquidity into the banking system.
Federal Reserve Bank of Richmond President Jeffrey Lacker will speak today at the annual meeting of the Risk Management Association, in Charlotte, North Carolina. San Francisco Fed President Janet Yellen also speaks today on the U.S. economic outlook in the Californian city.
The euro gained 4 percent against the dollar this year amid speculation signs of a global economic recovery will boost investor appetite for higher-risk assets, such as stocks. The currency will probably trade at $1.50 by year-end, according to HSBC Holdings Plc.
Low U.S. Rates
“The low interest rate structure for many years to come in the U.S. is going to start undermining the dollar,” David Bloom, global head of foreign-exchange strategy at HSBC in London, said in an interview on Bloomberg Television. “At some stage by the end of the year, we’re going to get inklings by the ECB that they’ll be looking to tighten sometime next year.”
The three-month London interbank offered rate, or Libor, for dollar loans dropped below that of the Swiss franc on Sept. 8, making the greenback the cheapest currency to fund purchases of higher-yielding assets. The spread between three-month Libor for yen and dollar loans was 7.25 basis points on Sept. 8, according to British Bankers’ Association data.
Using the world’s reserve currency to fund carry trades became more profitable and less risky last month than with the yen for the first time since March 2008, Bloomberg data show. The difference in Sharpe ratios for dollars and yen, a measure of performance versus risk, has averaged 1.35 since May, compared with minus 0.37 since 2004. The higher the Sharpe ratio, the higher the risk-adjusted return.
‘Big Funding Currency’
“The dollar is the big funding currency,” said Jonathan Clark, vice chairman of New York-based FX Concepts Inc., the world’s largest currency hedge fund, with $9 billion in assets under management. “The reason why people are borrowing the U.S. dollar for carry trade is A: It’s very cheap to fund, and B: The expectation is it’s going to go down.”
In carry trades, investors borrow in a country with low rates and invest where returns are higher. The U.S. target rate is as low as zero, compared with 3 percent in Australia and 2.5 percent in New Zealand.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net
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