Yen, Dollar Rise as Global Recession Spurs Demand for Safety

March 12 (Bloomberg) -- The yen and the dollar rose against the euro on speculation the deepening global recession will increase demand for the currencies as a refuge.

The yen and the dollar also strengthened versus the Australian and New Zealand dollars as stock markets snapped two days of gains, reducing the allure of higher-yielding currencies. The euro fell for the first time in three days against the greenback before a German report that economists say will show industrial production dropped for a fifth month, giving the European Central Bank more scope to cut interest rates.

“The market is troubled by the lack of follow-through in equity markets and it has held the risk rally back,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London.

The yen appreciated to 122.41 versus the euro as of 9:20 a.m. in London, from 124.86 yesterday in New York. The dollar strengthened to $1.2769 per euro, from $1.2837. The Japanese currency advanced to 95.68 per dollar, from 97.27. It may rise to 94 per dollar this week, then fall to 100 in the next couple of months, Gullberg said.

The yen climbed 3 percent to 61.56 against the Australian dollar and rose 2.3 percent to 48.77 versus the New Zealand currency.

The yen gained versus all 16 of the most-traded currencies after the Cabinet Office said Japan’s gross domestic product shrank an annualized 12.1 percent last quarter, the fastest pace since 1974, and the MSCI World Index of stocks fell 0.6 percent.

‘Sell’ Signals

“It is still premature to judge that the financial crisis is over,” said Shinya Furue, an economist at Norinchukin Research Institute Ltd. in Tokyo. “It is difficult to expect increased buying of stocks or rising capital inflows into emerging-market currencies.”

The market is trading on the assumption that U.S. and Japanese investors are stepping up repatriation of funds when risk aversion increases, bolstering the domestic currencies at the expense of higher-yielding currencies such as the Australian and New Zealand dollars, Gullberg said.

The dollar may weaken to 95 yen and $1.33 per euro as momentum charts show “sell” signals for the greenback, according to Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.

The U.S. currency may extend losses to that level, a 38.2 percent Fibonacci retracement of its rally to the March 5 high of 99.68 from the January low of 87.13, said Osamu Takashima, chief foreign-exchange analyst in Tokyo at Bank of Tokyo-Mitsubishi.

Rate Cut

Fibonacci analysis also indicates the dollar will drop to $1.33 per euro, Takashima wrote in a research note today.

New Zealand’s dollar snapped two days of gains versus the yen after the central bank cut its benchmark rate by half a percentage point to 3 percent, weakening the appeal of the currency. New Zealand’s policy rate compares with 0.1 percent in Japan and a 3.25 percent in Australia.

The euro fell for a second day against the yen on speculation a German report today will show industrial output declined in January.

The European Central Bank still has “room to move” after reducing the benchmark interest rate to 1.5 percent on March 5, ECB council member Erkki Liikanen said yesterday in Helsinki.

“Additional rate cuts by the ECB and weaker euro-region economic data could trigger the euro-yen to head lower,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader. The yen will rise to 120 per euro in coming months, he said.

Industrial Output

Industrial output in Germany fell a seasonally adjusted 3 percent in January from the previous month, according to a Bloomberg News survey of economists. The figures will be released at noon in Berlin.

Losses in the dollar against the yen may be limited on speculation U.S. investors will bring back earnings from overseas assets because of concern the global recession will worsen.

Sales at U.S. retailers dropped 0.5 percent in February, the seventh decline in eight months, a separate Bloomberg survey of economists showed before the Commerce Department report today.

“Retail sales are likely to signal a further deterioration of the U.S. economy, which may spark renewed repatriation of the dollar by U.S. investors,” said Takashi Matsumura, a Tokyo-based economist at Mizuho Research Institute, a unit of Japan’s second- largest banking group.

The Dollar Index, which the ICE uses to track the greenback’s performance against the currencies of six major U.S. trading partners, was little changed at 87.870. The index touched 89.624 on March 4, the highest level since April 2006.