Dollar May Fall Against Yen on Concern U.S. Recession to Worsen

Feb. 17 (Bloomberg) -- The dollar may fall for a second day against the yen before U.S. housing and manufacturing reports economists estimate will show the recession is deepening.

The pound may decline for a third day versus the yen on speculation a U.K. report will show inflation slowed amid an economic slump, giving the Bank of England room to cut interest rates. The euro may weaken for a second day against the dollar on concern about financial turmoil in central and eastern Europe.

“The market is shifting its attention back to the state of the economy,” said Takashi Matsumura, a Tokyo-based economist at Mizuho Research Institute, the unit of Japan’s second-largest banking group, Mizuho Financial Group Inc. “The upcoming economic data are likely to signal further worsening of the U.S. economy, boding ill for the dollar.”

The dollar was little changed at 91.71 yen as of 8:57 a.m. in Tokyo from 91.73 yen late in New York yesterday. It traded at $1.2797 per euro from $1.2801. The euro was at 117.37 yen from 117.46, and declined to 89.51 British pence from 89.56 pence.

Japan’s currency traded at 130.97 against the pound from 131.15 late in New York yesterday, and was at 79.06 versus the Swiss franc from 79.10.

Manufacturing, Housing

The Federal Reserve Bank of New York’s general economic index, fell to minus 23.75 in February from minus 22.2 the previous month, according to a Bloomberg News survey of economists. The National Association of Home Builders/Wells Fargo index of builder confidence remained at a record low of 8 in February from January, a separate Bloomberg survey shows. The figures will be released today.

Benchmark interest rates are 3.25 percent in Australia and 3.50 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere.

In these so-called carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates. The risk is that market moves can erase those profits.

The pound may weaken as the Office for National Statistics may say today that the U.K.’s consumer prices rose 2.7 percent in January from a year earlier, compared with 3.1 percent the previous month, another Bloomberg survey shows.

The euro may fall amid growing concern that Ireland will default on its national debt. Credit-default swaps on the nation’s five-year sovereign debt jumped 49 basis points on Feb. 13 to a record 377 basis points, according to CMA Datavision prices. That’s 18 basis points more than Costa Rica’s.

The rising cost of insuring against default by a “peripheral” European government “remains an important background negative for the euro,” Steven Pearson, a strategist in London at Merrill Lynch & Co., wrote in a note yesterday.