Dollar, Yen Rise on Concern Recovery to Be Slow as Stocks Drop

By Matthew Brown and Yoshiaki Nohara

Oct. 2 (Bloomberg) -- The dollar and the yen rose on concern rising unemployment and loan defaults will slow the U.S. economic recovery, sending stocks lower and boosting demand for the currencies as a refuge.

Europe’s single currency was poised for a second week of declines against the dollar on speculation Group of Seven finance officials meeting in Istanbul this weekend will discuss the euro’s gains. The number of U.S. lenders that can’t collect on at least 20 percent of their loans hit an 18-year high, according to Federal Deposit Insurance Corp. data. A government report today may show U.S. employers cut jobs for a 21st month.

“The G-7 is coming up, there’s concern about the jobs data and the market is on tenterhooks,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp. “There’s been a degree of consolidation over the last two weeks as the market took a bit of risk off the table.”

The Japanese currency was at 129.93 versus the euro as of 9:09 a.m. in London from 130.35 in New York yesterday. It earlier reached 129.64, the highest level since July 14. The dollar was at $1.4536 per euro from $1.4545. It earlier touched $1.4503, the highest level since Sept. 10. The yen was at 89.42 per dollar from 89.40.

U.S. employers shed 175,000 jobs in September after a reduction of 216,000 in August, according to the median forecast of economists surveyed by Bloomberg News. A separate survey showed the U.S. unemployment rate probably rose to 9.8 percent in September from 9.7 percent in August. The Labor Department will release the figures today in Washington.

‘A lot Slower’

“We have to remember the growth going forward is going to be a lot slower than growth we’ve seen over the past five years,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Risk appetite will be tempered a little bit. The U.S. dollar will be supported.”

Goldman Sachs Group Inc. yesterday changed its forecast on the payrolls data to show larger cuts, citing “disappointing” economic data, including the number of people receiving jobless benefits. Payrolls probably fell by 250,000 workers last month rather than the 200,000 Goldman Sachs had previously estimated, chief U.S. economist Jan Hatzius said in a note to clients.

Units of Frontier Financial Corp., Towne Bancorp Inc. and Steel Partners Holdings LP are among 26 firms with more than one-fifth of their loans 90 days overdue or not accruing interest as of June 30 -- a level of distress almost five times the national average -- according to FDIC data compiled for Bloomberg News by SNL Financial, a bank research firm. Three reported almost half of their loans weren’t being paid.

Recovery to Falter

The U.S. recovery will falter as banks continue to curb lending to small companies, said Meredith Whitney, whose 2007 prediction that Citigroup Inc. would cut its dividend triggered a plunge in the bank’s stock.

“Access to credit is being denied at an accelerating pace,” Whitney said in a commentary in the Wall Street Journal. While large companies have no problem obtaining loans, small businesses “have never had a harder time,” she said in the article, dated yesterday.

The euro reached $1.4844 on Sept. 23, the highest level in a year, making European exports more expensive.

The 16 nations that use the euro have a “shared interest in a strong and stable international financial system,” European Central Bank President Jean-Claude Trichet said yesterday after a meeting of euro-area finance ministers in Sweden before the G-7 gathers in Istanbul.

‘Excess volatility’

“Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability,” Trichet said.

Portuguese Finance Minister Fernando Teixeira dos Santos also said yesterday European officials are concerned about the impact of the euro’s advance on the region’s exports. U.S. Treasury Secretary Timothy Geithner reiterated that a “strong dollar is very important” to the U.S.

“Worries are high that this weekend’s G-7 meeting will discuss the euro’s strength,” said Akane Vallery Uchida, a currency strategist at Royal Bank of Scotland Group Plc in Tokyo. “These concerns are likely to weigh on the euro, especially against the yen, which may be also benefiting from a slight rise in risk aversion.”

G-7 finance ministers and central bankers may break with tradition and choose not to release a statement on the global economy and currencies, said officials who declined to be identified. The G-20 anointed itself last week as the global economy’s main policy forum.

Carry Trades

An increase in carry trades funded in the dollar may push the greenback toward $1.50 against the euro, Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong, said in an interview with Bloomberg Television. “But that is likely to be the top. In fact, I would expect some verbal intervention from the ECB and finance ministers from the eurozone if it goes above $1.50.”

The yen gained as concern mounted that a seven-month rally in equities outpaced prospects for a global economic recovery, spurring investors to sell stocks in favor of safer assets.

The MSCI World Index of shares slid 0.9 percent and the Dow Jones Stoxx 600 Index of European shares slipped 1.1 percent. The MSCI Asia Pacific Index slid 2.1 percent. The VIX Index, a measure of stock-market volatility known as Wall Street’s fear gauge, climbed to 28.27 yesterday, the highest level since Sept. 3, from 25.61 on Sept. 30.

Risk Aversion

“Risk aversion is being fueled by worries over the durability of the recovery around the world, especially the U.S.,” said Yuji Saito, head of the foreign-exchange group at Societe Generale SA, France’s third-largest bank. “Equities are also weak and another reason to avoid risk. The bias is for the yen and the dollar to be bought.”

Japan’s currency rose to a six-month high on a trade- weighted basis last month amid speculation the Federal Reserve will keep interest rates low and the government led by Yukio Hatoyama won’t intervene to stem the yen’s gain.

The yen’s real effective exchange rate advanced 3.1 percent in September from a month earlier to 118.5, the fastest increase since December, the Bank of Japan said today in Tokyo. The gauge measures the yen’s value against the currencies of 15 trading partners after adjusting for inflation.

With interest rate differentials between Japan and the U.S. having little room to narrow, “the yen may rise to as high as 85 per dollar, though its unlikely to strengthen further than that,” said Yuji Kameoka, senior economist at Daiwa Institute of Research in Tokyo.

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net