Yen Climbs as Signs of Slowing Recovery Spur Demand for Safety

By Lukanyo Mnyanda and Yasuhiko Seki

Dec. 8 (Bloomberg) -- The yen rose against the euro and higher-yielding peers as signs the global economic recovery is losing momentum spurred demand for the currency as a refuge.

The yen gained versus its 16 most-traded counterparts monitored by Bloomberg before reports this week that may show German industrial production slowed and the U.S. trade deficit widened. Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. faces “formidable headwinds.” The pound fell after Moody’s Investors Service said the U.S. and the U.K. have “resilient” Aaa ratings, as opposed to the “resistant” top ratings of Canada, Germany and France.

“It’s the broad retrenchment in markets more than anything else” driving the yen, said Simon Derrick, London-based chief currency strategist at BNY Mellon Corp., the world’s biggest custody bank. “Calling it a retreat from risk sounds too simplistic, but there is a natural desire as we get into the holiday season for people to lock in their profit.”

The yen strengthened to 131.86 per euro as of 9:45 a.m. in London, from 132.71 yesterday in New York, and appreciated to 88.82 per dollar, from 89.51. The dollar was at $1.4846 per euro, from $1.4827 yesterday, when it appreciated to $1.4756, the strongest level since Nov. 4.

Industrial production in Germany expanded 1 percent in October from a month earlier, the Economy Ministry in Berlin will say at noon local time, according to the median estimate of 38 economists in a Bloomberg survey. The U.S. trade deficit widened to $36.9 billion in October, from $36.5 billion in September, according to a separate Bloomberg survey before the Commerce Department report in two days.

Yen Strength

The yen strengthened to 11.9400 against the South African rand, from 11.9933 yesterday. It also gained a second day versus the Australian dollar, trading at 81.19 yen, from 81.69.

“We still have some way to go before we can be assured that the recovery will be self-sustaining,” Bernanke said in a speech to the Economic Club of Washington. “My best guess at this point is that we will continue to see modest economic growth next year -- sufficient to bring down the unemployment rate, but at a pace slower than we would like.”

Futures on the Chicago Board of Trade showed a 46 percent chance yesterday the Fed will raise the target lending rate by at least a quarter-percentage point by its June meeting, down from 54 percent a day earlier. The central bank next meets to review borrowing costs on Dec. 16.

The dollar has declined 5.9 percent this year against the euro as the Fed kept the target rate between zero and 0.25 percent and bought assets in a bid to lower borrowing costs. The European Central Bank’s main refinancing rate is at 1 percent, also a record low.

Japan Package

The yen tends to strengthen amid economic and financial turmoil because Japan’s trade surplus makes it less reliant on foreign capital. The nation’s current-account surplus increased 42.7 percent to 1.4 trillion yen ($15.7 billion) in October from a year earlier, the Ministry of Finance said today.

Japan’s government also today unveiled a 7.2 trillion yen economic spending package. The plan includes 3.5 trillion yen to help regions, 600 billion yen for employment and 800 billion yen on environmental initiatives, the Cabinet said in a statement.

The currency also rose amid speculation Japanese officials won’t act to weaken it even as they say they are concerned about the effect of yen strength on the economy.

‘Still in Doubt’

“People are still in doubt about whether the Bank of Japan will intervene and put action behind their words,” said Niels Christensen, a currency strategist in Copenhagen at Nordea Bank AB. “Bernanke definitely ruled out a rate hike for a very long time and that’s also putting downward pressure on dollar-yen.”

The pound weakened after Moody’s said the U.K.’s and U.S.’s finances are deteriorating and may “therefore test the Aaa boundaries.” None of the top-rated countries is “vulnerable,” or have public finances that are “stretched beyond the point of ‘no return’ to the Aaa category,” the ratings company said.

The pound dropped to $1.6351, from $1.6446 yesterday, and weakened to 90.88 pence per euro, from 90.16 pence.

Demand for the yen also strengthened on speculation companies including Hitachi Ltd. and Mitsubishi UFJ Financial Group Inc. will bring home funds from share and asset sales.

“Japanese firms, such as those raising capital from selling shares and assets abroad, are likely to repatriate money,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. Ltd. in Tokyo. “This is a yen-positive factor.”

Hitachi said in a statement last month it may sell 400 million shares to Japanese investors and 600 million shares to overseas buyers at a price to be set between Dec. 7 and Dec. 10. Mitsubishi UFJ plans to offer about 1 trillion yen of stock, according to documents sent to investors. The price for the sale will be set as early as Dec. 14, said Daiwa Securities Group Inc., one of the underwriters.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

Last Updated: December 8, 2009 05:28 EST