Yen, Dollar Weaken on Signs of Economic Recovery, Stock Gains

By Yasuhiko Seki and Ron Harui

Dec. 3 (Bloomberg) -- The yen weakened for a third day against the euro and the dollar declined as signs the global economy is recovering boosted demand for higher-yielding assets.

Japan’s currency slid against all 16 of its most-traded counterparts tracked by Bloomberg before reports forecast to show European retail sales fell at a slower pace and U.S. service industries expanded. The euro rose on speculation the European Central Bank will announce plans to scale back emergency lending while keeping its main interest rate at a record low at a meeting today in Frankfurt.

“With the global economy recovering, risk trades will weigh on the funding currencies” such as the yen and the dollar, said Soichiro Mori, manager of foreign-exchange promotion at FXOnline Japan Co., a margin-trading company. “Higher-yielding currencies will benefit from the liquidity- driven play.”

The yen depreciated to 132.77 per euro as of 7:17 a.m. in London from 131.46 yesterday in New York, and 132.78 earlier, the weakest level since Nov. 24. Japan’s currency also fell to 87.87 per dollar from 87.38, after sliding to 87.92, the weakest level since Nov. 25. The yen rose to 84.83 to the dollar on Nov. 27, the highest since July 1995. The euro rose to $1.5112 from $1.5044.

Retail sales in the 16-nation euro region fell 2.4 percent in October from a year earlier after a 3.6 percent drop the previous month, according to a Bloomberg News survey of economists. The European Union statistics office releases its report at 11 a.m. Brussels time.

Services Report

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the U.S. economy, rose to 51.5 in November from 50.6 in October, according to a separate Bloomberg survey before today’s report due at 10 a.m. New York time.

Futures on the Standard & Poor’s 500 Index rose 0.6 percent, the Nikkei 225 Stock Average advanced 3.8 percent, the most since May 7, and the MSCI Asia Pacific Index of regional shares climbed 1.7 percent.

“The risk trade continues,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in an e-mail to Bloomberg today. “Till year-end, euro-dollar continues to be a main trade.”

The euro strengthened against 10 of its 16 major counterparts. ECB President Jean-Claude Trichet will say today that its third offer of 12-month loans to banks on Dec. 15 will be the last and may signal a reduction in other lending operations, according to economists surveyed by Bloomberg.

ECB officials will leave the benchmark rate at 1 percent, according to all 54 economists polled.

‘Lead the Exit’

“There is a strong belief the ECB will lead the exit of credit-easing among the developed countries,” said Kazumasa Yamaoka, senior currency analyst in Tokyo at GCI Capital Co., a foreign-exchange margin-service company. “This perception will support the euro against the dollar and the yen.”

Benchmark rates are 0.1 percent in Japan and as low as zero in the U.S., making the countries’ currencies popular for funding so-called carry trades. In such trades, investors buy higher-yielding assets with money borrowed in nations with low interest rates. The risk is that currency market moves will erase their profit.


Japan’s currency also weakened after Vice Finance Minister Rintaro Tamaki met with U.S. Treasury officials this week in Washington, spurring speculation the two nations are discussing how to tackle the yen’s strength. Tamaki is head of international affairs, including currency policy.

‘Laissez-Faire Policy’

“Japan is shifting away from a laissez-faire policy on the rising yen,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Ltd. “The possibility of actual intervention may strengthen if the yen reaches 83 per dollar.”

The government of Prime Minister Yukio Hatoyama should revise the Bank of Japan’s by-laws to give it a mandate to stabilize prices and expand employment, similar to that of the U.S. Federal Reserve, said Eishi Wakabayashi, a strategist who forecast the yen’s surge to an all-time high in April 1995.

Wakabayashi, head of Tokyo-based Wakabayashi FX Associates Co., said the BOJ should re-think its “fundamentalist” stance on combating inflation while neglecting measures to stimulate the economy.

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