Yen Falls on Concern Investors Will Seek Higher Yields Overseas

March 16 (Bloomberg) -- The yen fell for a third day against the dollar and the euro on speculation a Bank of Japan plan to buy government debt will spur investors to seek higher- yielding assets overseas.

Japan’s currency extended this month’s decline before the central bank starts a two-day meeting tomorrow at which it may announce plans to repurchase government securities to keep yields low. The euro weakened against nine of the 16 major currencies on speculation the reluctance of European nations to boost spending will extend the region’s recession and add pressure for lower interest rates.

“The yen is likely to be under weakening pressure amid speculation longer-dated yields will decline,” widening the gap between returns on Japanese government securities and those of other states and reducing the currency’s appeal, said Hideki Hayashi, an economist at Shinko Securities Co. in Tokyo.

The yen weakened to 98.11 versus the dollar as of 7:40 a.m. in London from 97.95 late in New York last week. It reached 99.68 on March 5, the lowest level since Nov. 5. Japan’s currency declined to 127.02 per euro from 126.65. The European currency traded at $1.2946 from $1.2928.

South Korea’s won strengthened 3.6 percent to 1,435.40 against the dollar, and climbed 3.4 percent to 14.6354 versus the yen. The British pound climbed to $1.4078 from $1.4002 late last week.

Treasuries due in 10 years yielded 1.60 percentage points more than similar dated Japanese debt, near the 1.73 percentage points reached on Feb. 27, which was the widest since November, according to data compiled by Bloomberg. The spread between 10- year Australian and Japanese debt widened to 2.98 percentage points today.

‘Huge Step’

The euro was little changed after four days of gains versus the greenback after German Chancellor Angela Merkel and other European officials said they had spent enough money to combat the financial crisis and don’t want to blow out their budgets.

Merkel, speaking as the Group of 20 finance ministers met in the U.K. on the weekend, defended her government’s decision to hold off new economic stimulus spending, saying current investments should first be given a chance to work. Germany has already committed 4.7 percent of its gross domestic product toward stanching the economic downturn for this year and next, the German Chancellor said.

“If we want to increase the effectiveness of such a stimulus package, then we first have to implement it, so to speak, and not to begin speaking of the next measure when the first one isn’t through,” Merkel said. “I think we’ve already taken a huge step.”

‘Downward Pressure’

“The expectation for further monetary easing and the reluctance to expand fiscal spending will weigh on the euro,” said Satoru Ogasawara, foreign-exchange analyst and economist in Tokyo at Credit Suisse Group AG, the second-largest Swiss bank. “Such policies apply downward pressure on the European currency.”

Demand for the euro may wane on speculation the European Central Bank will cut rates further to combat the region’s recession. Investors increased bets the European Central Bank will reduce interest rates at its next meeting on April 2. The yield on the three-month Euribor interest-rate futures due June fell to 1.465 percent, from 1.58 percent a month ago, according to data compiled by Bloomberg.

Overbought

The euro may fall to $1.2730 this week, said Commerzbank AG, German’s second-largest lender, citing technical charts traders use to predict price movements.

“The euro was overbought last week and stepped closer to the upper limit of the Bollinger band on the back of speculation that stock gains would improve risk appetite, which is why the single currency is weakening today,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo.

The euro strengthened to $1.2958 on March 13, crossing above the upper Bollinger band resistance level of $1.2952 on the euro’s daily chart, Muramatsu said. Bollinger bands are two standard deviations above and below the average price of a currency or a security over the past 20 days.

Asian currencies were led higher by the won as regional shares rallied. The Korean currency extended its biggest weekly gain in three months on speculation the U.S. will boost the supply of dollars to emerging markets to ease the global financial crisis. The MSCI Asia Pacific Index for regional shares advanced 1.8 percent today.

‘Very Positive’

“In the short-term, with the rally in equities continuing and the buying of Asian stocks having picked up in recent days, that’s very positive for Asian currencies,” said Mitul Kotecha, head of global foreign-exchange strategy at Calyon, the investment-banking unit of French bank Credit Agricole SA. “I’m not exactly positive for the medium term. We’re still in a high risk-aversion environment.”

Foreign governments and private investors are both pouring money into dollars for the first time since 2001, signaling that the U.S. currency is peaking, according to Barclays Capital Inc.

The Dollar Index, which the ICE uses to track the U.S. currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, was 87.220 today, from 87.358 last week and 81.308 at the end of last year.

Steven Englander, chief U.S. currency strategist at Barclays, estimates foreign purchases of American assets have reached record levels, after they bought $133 billion a month on average since November, based on government statistics.

“People are sitting there holding massive amounts of zero- yielding dollar assets,” said Englander, a Yale University Ph.D. who started his career at the Federal Reserve Bank of New York. “If there is any sort of good news, demand for dollars can drop off very, very quickly.”

Fed Chairman Ben S. Bernanke and his colleagues start a two-day policy meeting tomorrow. The central bank will keep borrowing costs unchanged at 0.25 percent, according to the median estimate of economists surveyed by Bloomberg.