Yen Gains as Global Factory Weakness Erodes Higher-Yield Demand

Dec. 1 (Bloomberg) -- The yen rose to a one-month high against the dollar and gained versus the euro as plunging global manufacturing and stocks prompted bets investors will buy back Japan’s currency at the expense of higher-yielding assets.

The dollar advanced against the euro and the pound as investors sought shelter in U.S. government debt. The yuan dropped the most against the greenback since China ended a fixed exchange rate in 2005, while Russia’s ruble slid to a 2 1/2-year low. The U.S. economy entered a recession in December 2007, the first since 2001, the National Bureau of Economic Research said.

“From now to year-end, we’ll see more strength in low- yielders, the yen and the dollar,” said Benedikt Germanier, a currency strategist in Stamford, Connecticut, at UBS AG, who recommended that investors buy the two currencies. “The demand for liquidity and global yield convergence are supporting the yen and the dollar.”

The yen appreciated 2.5 percent to 93.19 per dollar at 4:10 p.m. in New York, from 95.52 last week, after touching 93.05, the strongest level since Oct. 28. The yen gained 3.1 percent to 117.61 per euro from 121.22. The dollar appreciated 0.6 percent to $1.2619 per euro from $1.2691, after touching $1.2583, the strongest since Nov. 24. The U.S. currency will advance to $1.20 by year-end, according to UBS.

The greenback rose 3.1 percent to $1.4910 per pound and 5.1 percent to 49.92 U.S. cents versus New Zealand’s currency on speculation a deepening global slump will encourage investors to shun higher-yielding holdings for Treasuries.

Treasuries Gain

U.S. debt rose today, pushing the yield on the 10-year note to a record low, as Federal Reserve Chairman Ben S. Bernanke said in a speech in Austin, Texas, that the central bank may use less conventional policies, such as buying Treasuries, to revive the economy.

The yield on the benchmark note was 1.31 percentage points higher than the Japanese security of comparable maturity, the narrowest difference since 1993, making the U.S. debt less attractive to investors.

“The yen still has further room to go against the dollar because the currency pair still tracks the longer-term yield differential, which remains quite tight,” said David Tien, senior quantitative researcher in New York at Fischer Francis Trees & Watts, which has $27 billion in assets under management.

The Institute for Supply Management’s U.S. factory index fell to 36.2 in November, the lowest level since 1982, the Tempe, Arizona-based group reported today. A reading of 50 is the dividing line between expansion and contraction. Similar gauges for the euro zone and the U.K. dropped to records.

Weaker Yuan

The yuan slid as much as 1 percent to 6.8849 per dollar, the weakest level since June, as the China Federation of Logistics and Purchasing reported that the nation’s manufacturing shrank in November by the most on record.

The ruble fell as low as 28.0325 per dollar, the weakest since March 2006, after VTB Bank Europe’s purchasing managers’ index for manufacturing reached a record low last month. Russia has used a quarter of its foreign reserves, the world’s third- largest, to stem a 16 percent slide in the ruble against the dollar since the beginning of August.

Japan’s currency gained 6.3 percent to 138.20 per pound, the biggest jump since 1973, and 6.5 percent to 49.25 against New Zealand’s dollar as the plunge in manufacturing and stocks increased bets investors will unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s target lending rate of 0.3 percent compares with 6.5 percent in New Zealand, 3.25 percent in the euro zone and 3 percent in the U.K.

The Standard & Poor’s 500 Index fell 8.9 percent today after surging 12 percent last week, when the Fed said it will assign $800 billion in new funding to bolster credit for homebuyers, consumers and small businesses. The Dow Jones Stoxx 600 Index of European shares dropped 6 percent.

The U.S. economic contraction is a year old, already longer than the last recession, which was from March to November 2001, according to the NBER, a private, nonprofit group of economists based in Cambridge, Massachusetts.

Interest rates will be lowered this week to 5 percent in New Zealand, to 4.5 percent from 5.25 percent in Australia, to 2 percent in the U.K. and to 2.75 percent in the euro region as central banks move to stem the economic slowdown, according to the median forecasts of analysts surveyed by Bloomberg.

“Aggressive rate cuts from the central banks meeting this week are required and will ensure the dollar and yen remain the best-performing currencies over the coming months,” Derek Halpenny, head of currency research at Bank of Tokyo-Mitsubishi in London, wrote in a note to clients today.