Yen Rises as Economic Concerns Damp Demand for Higher Yields

By Yasuhiko Seki and Ron Harui

Oct. 28 (Bloomberg) -- The yen gained against the euro and dollar on speculation the global economic recovery will slow, reducing demand for higher-yielding assets.

The euro slid to a one-week low against Japan’s currency before reports this week forecast to show German consumer prices fell and unemployment rose, backing the case for the European Central Bank to hold down interest rates. Australia’s dollar dropped versus the yen as a report showed inflation slowed, easing speculation the central bank will speed up rate increases.

“As the market shifts attention to the sustainability or the strength of a recovery from a cyclical upturn, the mood of euphoria may wane,” said Masahide Tanaka, senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second- largest lender.

The yen rose to 135.50 per euro as of 6:56 a.m. in London from 135.89 in New York yesterday, after earlier reaching 134.85, the highest level since Oct. 20. Japan’s currency fetched 91.33 per dollar from 91.80. The dollar traded at $1.4833 per euro from $1.4804 yesterday, when it touched $1.4770, the strongest level since Oct. 13.

Australia’s currency dropped to 91.29 U.S. cents from 91.66 cents yesterday after touching 90.73 cents, the least since Oct. 14. It was at 83.39 yen from 84.14 yen yesterday.

German Prices

The jobless rate in Germany, Europe’s biggest economy, probably rose to 8.3 percent in October from 8.2 percent in the previous month, according to a Bloomberg News survey of economists before the report’s release tomorrow.

The nation’s consumer price index, calculated using a harmonized European Union method, fell 0.1 percent in October from a year earlier after slipping 0.5 percent in September, a separate survey showed. The Federal Statistics Office in Wiesbaden will release the report later today.

“We expect German CPI to remain weak,” Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, wrote in a research note yesterday. “We continue to target the euro- dollar back at $1.45 in one month as sentiment is clearly showing signs of strain.”

The ECB will maintain its benchmark interest rate at 1 percent through the second quarter of 2010, a Bloomberg survey showed. The central bank next meets on Nov. 5.

Australia’s consumer prices advanced 1 percent from the second quarter, when it gained 0.5 percent, the Bureau of Statistics said in Sydney today. The median estimate of 20 economists surveyed by Bloomberg News was for a 0.9 percent increase. Prices gained 1.3 percent from a year earlier.

Unsustainable Rally

“We saw a modest drop in the pricing of expectations of a 50 basis point hike next week in Australia, which weighed a bit on the Aussie,” said David Forrester, a currency economist in Singapore at Barclays Capital. “Since then it’s been taken over by what’s going on with the U.S. dollar and equity markets.”

Futures markets pared to 10 percent from 14 percent yesterday the chance of a 50 basis point increase in official interest rates when the reserve bank meets next week.

The yen rose against all 16 of the most-active currencies on concern a rally in stocks and commodities can’t be sustained.

The six-month run-up in shares and raw materials is probably at its peak as U.S. growth lags behind historical averages, according to Bill Gross at Newport Beach, California- based Pacific Investment Management Co.

Gross, a founder and co-chief investment officer of the world’s biggest manager of bond funds, has predicted a “new normal” in the global economy that will include heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

“What has happened is that our ‘paper asset’ economy has driven not only stock prices, but all asset prices higher than the economic growth required to justify them,” Gross wrote yesterday on Pimco’s Web site.

Japan Retail

The Standard & Poor’s 500 Index slipped 0.3 percent to 1,063.41 yesterday in New York. The Nikkei 225 Stock Average fell 1.4 percent today, while the MSCI Asia Pacific Index of regional shares lost 1 percent.

Adding to signs the recovery will be slow, Japan’s retail sales fell for a 13th month in September, the Trade Ministry said today in Tokyo. Sales slid 1.4 percent from a year earlier.

The dollar fell against the Japanese currency on renewed concern over the health of the U.S. banking sector.

GMAC Inc., the lender that received two government bailouts totaling $13.5 billion, is in talks with the Treasury Department to receive a third lifeline, a person familiar with the matter told Bloomberg News.

GMAC Support

“This development may renew worries over the health of the U.S. financial sector,” Takashi Kudo, director of foreign- exchange sales at NTTSmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp., said about GMAC. “This could add to the argument for the Fed to keep borrowing costs low, and would likely be negative for the dollar and positive for the yen.”

GMAC is preparing to report third-quarter results on Nov. 4 after posting losses in seven of the past eight periods. The U.S. rescued GMAC last December after deciding the firm was crucial to the survival of the auto industry. General Motors Co., its former parent, and Chrysler Group LLC rely on GMAC to provide financing to customers.

The dollar reached 92.32 yen yesterday, the strongest level since Sept. 21, on speculation that Federal Reserve will change rhetoric on the duration of credit easing when policy makers meet next week.

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