Yen, Dollar Gain as China-Slowdown Concern Spurs Safety Demand

By Bo Nielsen and Yoshiaki Nohara

Jan. 15 (Bloomberg) -- The yen and the dollar rose on speculation a slowdown in Chinese bank lending will damp growth in the world’s third-biggest economy, boosting demand for the safety of the Japanese and U.S. currencies.

The yen strengthened against all 16 of its major counterparts this week as weaker-than-expected U.S. retail sales and concern Chinese banks are reducing property loans sapped appetite for higher-yielding assets. The euro fell for a second day against the dollar as Greece’s struggle to cut its budget deficit dented investor confidence in European assets.

“The world is looking for China to drive growth, so a tightening policy there is bad for risk,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “The correlation between the yen and risk aversion is becoming tight again.”

The yen climbed to 130.84 per euro as of 10:01 a.m. in London from 132.25 in New York yesterday, after earlier rising to 130.49, the strongest level since Dec. 22. The dollar advanced to $1.4405 per euro from $1.4499. The yen traded at 90.81 per dollar from 91.21.

Chinese banks are now only interested in making loans for residential developments, the Guangzhou-based 21st Century Business Herald said on its Web site. The banks aren’t extending loans for luxury homes and commercial developments, the newspaper said, citing unidentified commercial bank officials.

China’s Slowdown

The People’s Bank of China this week unexpectedly said it will increase the proportion of deposits the nation’s lenders must set aside as reserves in an effort to rein in growth. China’s economy is overheating as asset bubbles and inflation pressures build, posing a “major risk” to global growth, the World Economic Forum said yesterday.

“China is beginning to show signs of tightening, which should lead to risk aversion,” said Yoshihiro Nomura, a Tokyo- based foreign-exchange team manager at Trust & Custody Services Bank Ltd. “Investors are sensitive to China’s news. I wouldn’t be surprised if the euro-yen were to drop further.”

Commodity-related currencies fell on concern a slowdown in China will curtail the nation’s demand for raw materials. The Australian dollar dropped 0.6 percent to 92.65 U.S. cents and slipped 0.7 percent to 84.42 yen. China is Australia’s biggest trading partner.

‘No Special Treatment’

The euro extended its weekly decline against the yen after European Central Bank President Jean-Claude Trichet said individual members of the currency region can’t expect “special treatment.”

“The sharpening internal strains illustrate that the euro zone is far from being an optimal currency union,” Michael Hart, a foreign-exchange strategist at Citigroup Inc.in London, wrote yesterday in a report. “These internal strains are independent of the external value of the euro but will in turn continue to undermine it.”

Trichet, speaking after the central bank kept its benchmark interest rate at 1 percent yesterday, said nations must take the steps needed to tackle “sharply rising” budget deficits or face higher borrowing costs. German Chancellor Angela Merkel said Greece’s mounting budget deficit risks hurting the euro, adding the currency faces a “very difficult phase.”

The dollar still headed for a second weekly loss against the yen and the euro as traders added to bets that the Federal Reserve will keep interest rates near zero to revive growth in the world’s biggest economy.

U.S. Reports

U.S. industrial production growth slowed to 0.6 percent in December from 0.8 percent the previous month, according to a Bloomberg News survey of economists before the report today.

Retail sales unexpectedly fell in December, the Commerce Department said yesterday. U.S. employers the same month eliminated 85,000 jobs, the Labor Department said on Jan. 8. The median estimate of 76 economists in a Bloomberg News survey was for no change.

“My worry is about whether we’re going to have a sustainable recovery,” World Bank chief economist Justin Lin said yesterday to the Council on Foreign Relations in Washington. “I think a second dip is a very likely scenario.”

Futures on the Chicago Board of Trade show a 28 percent chance the Fed will raise its target lending rate by at least a quarter-percentage point by its June meeting, down from 49 percent odds a month ago.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net