Yen Gains Most in 2 Weeks on Falling Stocks, Producer Prices

By Yoshiaki Nohara and Ron Harui

Oct. 14 (Bloomberg) -- The yen gained the most against the euro in almost two weeks as Japanese stocks declined and a Bank of Japan report showed producer prices fell for a ninth month, boosting demand for the currency as a refuge.

The yen advanced against all 16 of its major counterparts after data from Japan’s central bank, which kept its benchmark interest rate unchanged today, spurred speculation that deflation will deepen. The dollar fell to a 14-month low against the euro before a U.S. report forecast to show retail sales dropped last month by the most this year, supporting the case for the Federal Reserve to keep interest rates low.

“The recovery in Japan’s economy is likely to lag that of other countries,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. Ltd. in Tokyo. “This may cause risk aversion and buying of the yen.”

The yen rose 0.6 percent to 132.49 per euro at 7:01 a.m. in London from 133.26 in New York yesterday. The intraday gain was the largest since Oct. 1. The Japanese currency advanced to 89.00 per dollar from 89.71. The dollar fell to $1.4887 per euro from $1.4854. Earlier it touched $1.4890, the weakest level since August 2008.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, declined to 75.564, after earlier dropping to 75.551, the lowest since Aug. 11, 2008.

The Nikkei 225 Stock Average lost 0.2 percent. The euro-yen exchange rate had a correlation of 0.79 with the Nikkei 225 in the past year, according to data compiled by Bloomberg. A reading of 1 would mean the two moved in lockstep.

Japan’s Producer Prices

Japan’s producer prices dropped last month as oil traded lower than last year’s levels and demand for materials waned, the Bank of Japan said. The costs companies pay for energy and unfinished goods declined 7.9 percent in September from a year earlier after sliding a record 8.5 percent in August.

The yen typically rises during times of economic and financial turmoil because Japan’s trade surplus means the country doesn’t have to rely on overseas lenders.

The Bank of Japan left its benchmark interest rate at 0.1 percent today and refrained from saying whether it would end its corporate debt purchase programs. The BOJ’s decision matched the forecast from all 20 economists surveyed by Bloomberg News. The rate will be kept through 2010, analysts forecast in a Bloomberg News survey.

The yen also strengthened after Reuters reported Japanese Vice Minister Naoki Minezaki as saying dollar weakness is likely to continue and Japan shouldn’t intervene in markets to halt gains in its currency. Minezaki is a deputy of Japanese Finance Minister Hirohisa Fujii.

‘Things Are Improving’

The dollar retreated against 15 of its 16 major counterparts as the Commerce Department is forecast to report sales at U.S. retailers fell 2.1 percent last month, after rising 2.7 percent in August, according to the median estimate of 78 economists in a Bloomberg News survey. The data is due today in Washington.

“Globally, things are improving, but the U.S. will be lagging a bit,” said Phil Burke, chief dealer for foreign- exchange spot trading at JPMorgan Securities in Sydney. “The U.S. dollar will probably weaken.”

Fed Vice Chairman Donald Kohn said yesterday inflation and growth will probably stay below the central bank’s objectives for some time, warranting very low interest rates for an “extended period.” The Fed today will release minutes of its Federal Open Market Committee’s meeting in September.

Australia Dollar

“Further talk of the U.S. rates remaining low for a long time in the minutes would likely weigh on the dollar, particularly versus the pound, the Australian dollar and the yen,” David Forrester, currency economist in Singapore at Barclays Capital, wrote in a note to clients today.

The Fed funds target range is zero to 0.25 percent. Policy makers may start raising the benchmark rate in the second quarter of 2010, according to analysts’ forecasts compiled by Bloomberg.

The Australian dollar rose to its highest level since August 2008 after a report showed China’s imports in September fell less than economists forecast.

The so-called Aussie gained against 14 of its 16 major counterparts after Australia’s largest trading partner said imports fell 3.5 percent in September from a year ago, less than the 15 percent drop forecast in a Bloomberg News survey.

“The China data in general showed pretty strong exports and imports,” said Forrester. The figures are “much stronger than consensus so it is good news for commodity currencies.”

Australia’s dollar rose to 91.42 U.S. cents, the most since August 2008, from 90.89 cents in New York yesterday.

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