Yen Trades Near Three-Month Low as Economy Erodes Haven Role

Feb. 25 (Bloomberg) -- The yen traded near the weakest level against the dollar since November as Japan’s deteriorating economy eroded the currency’s appeal as a refuge from the global financial crisis.

The yen weakened yesterday beyond 96 versus the greenback as Japanese Prime Minister Taro Aso’s approval rating slumped and economists forecast Japan’s trade deficit increased last month to the widest level since at least 1986. The dollar dropped versus the euro as U.S. stocks rose from the lowest level in 12 years, reducing demand for the world’s reserve currency as a haven.

“We’ve seen the first signs of the yen’s strength coming to an end,” said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada’s biggest bank by assets. “Exports are under severe pressure.”

Japan’s currency traded at 96.64 per dollar at 7:01 a.m. in Tokyo, after sliding 2.1 percent yesterday and touching 96.93, the weakest level since Nov. 25. The yen was at 124.12 per euro after losing 3.4 percent and reaching 124.76, the weakest level since Jan. 9. The dollar traded at $1.2843 per euro following a 1.2 percent decline.

Ukraine’s hryvnia tumbled yesterday to a record of 9.2900 per dollar after Moody’s Investors Service said it may cut the nation’s credit rating because political disputes are hurting policy makers’ attempts to spur the economy.

Chile’s peso was the biggest gainer versus the dollar among major Latin American currencies yesterday, appreciating 3.2 percent to 603.40. The government said it will sell $50 million a day to convert some of its foreign assets into local currency to fund an economic stimulus plan.

U.S. Stocks Advance

The dollar dropped against the euro as the Standard & Poor’s 500 Index gained 4 percent after Federal Reserve Chairman Ben S. Bernanke told the Senate Banking Committee that U.S. banks need not be nationalized. The Dow Jones Industrial Average rose 3.3 percent.

Japan’s currency declined against all of the major currencies yesterday, losing 4.5 percent to 9.81 against South Africa’s rand and 3.4 percent to 6.54 versus the Mexican peso. The yen declined against the euro for a fifth straight day yesterday, the longest stretch since September.

The dollar-yen correlation with the Nikkei-225 Stock Average was minus 0.89 since Feb. 16, when a report showed Japan’s economy shrank at an annual 12.7 percent pace in the last quarter, the most since the 1974 oil shock. The relationship was positive 0.86 in the 12 months to Feb. 16. A reading of 1 would mean the two moved in lockstep.

‘Broken Down’

“The correlation has broken down because the drivers are now changing,” said Ian Stannard, a foreign-exchange strategist at BNP Paribas SA in London. “Dollar-yen in particular will continue to move quite sharply higher.”

The yen was the best performer in 2008 among the 171 currencies tracked by Bloomberg, climbing 23 percent versus the dollar and 29 percent against the euro. The gains undermined overseas sales for exporters including Toyota Motor Corp., Honda Motor Co. and Sony Corp. The yen will trade at 96 against the dollar at the end of 2009, according to the median forecast of 47 economists surveyed by Bloomberg.

Japan’s trade deficit widened to 1.2 trillion yen ($12.4 billion) in January from 320.7 billion yen in the prior month, according to the median forecast of 29 economists surveyed by Bloomberg News. The report from the Finance Ministry is due later today. A government report on Feb. 27 will show core consumer prices probably dropped for the first time in more than a year, economists in a separate survey forecast.

Approval Rating

Prime Minister Aso’s approval rating fell 6.8 percentage points from last month to 11.4 percent, while his disapproval rating rose 8.8 points to 80.2 percent, according to the Sankei survey, conducted with Fuji News Network. The governing Liberal Democratic Party has the support of 21.9 percent, compared with 25.9 percent for the opposition Democratic Party of Japan.

The relationship between stocks and the yen has been in place since the beginning of 2005, when the so-called carry trade was established, according to Derek Halpenny, European head of global currency research in London at Bank of Tokyo Mitsubishi Ltd., which said at the end of January that the yen would start to weaken.

“From recent price action, I think it’s a fairly good bet that the carry has been unwound, and that will certainly weaken the risk-yen correlation,” Halpenny said.

In the carry trade, investors buy higher-yielding currencies with lower-yielding ones. The yen gained almost 30 percent against the dollar from June 22, 2007, to Dec. 17, 2008, as the carry trade all but evaporated.