Yen May Weaken a Third Day on Concern Japan’s Economy Worsening

March 10 (Bloomberg) -- The yen may fall for a third day against the dollar before a government report that analysts say will show Japan’s economy is deteriorating because of the global recession, reducing the appeal of the country’s currency.

Britain’s pound slipped below $1.38 yesterday for the first time since January after the government took a majority stake in Lloyds Banking Group Plc, the biggest U.K. mortgage lender. The euro may weaken for a second day versus the dollar after European finance ministers resisted calls for more aid to boost their economies.

“Japan’s economic data are poor and the political situation is uncertain, which all bode ill for the yen,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-largest lender. “There is a possibility of the yen testing 100 per dollar shortly.”

The yen traded at 99.02 against the dollar as of 8:33 a.m. in Tokyo from 98.84 late in New York yesterday. Japan’s currency was at 124.77 per euro from 124.65. The euro traded at $1.2601 from $1.2611.

Japan’s composite leading index of business conditions, an indicator of future economic activity, fell to 77.4 in January from 80 in December, according to economists surveyed by Bloomberg News. The coincident index, which shows current economic activity, fell to 89.8 from 92.4, according to a separate Bloomberg survey. The Cabinet Office will release both reports at 2 p.m. in Tokyo.

Machine Orders

Machinery orders slumped 40.2 percent in January from a year earlier, according to another Bloomberg survey before a Cabinet Office report tomorrow. The world’s second-biggest economy shrank an annualized 12.7 percent last quarter, the government said Feb. 16, the biggest contraction since 1974.

The Dollar Index, which the ICE uses to track the greenback’s performance against the currencies of six major U.S. trading partners, rose 0.6 percent to 89.009 yesterday. The index touched 89.624 last week, the highest level since April 2006. The Standard & Poor’s 500 index dropped 1 percent yesterday, while the Dow Jones Stoxx 600 of European equities lost 1 percent.

The pound fell yesterday against all of the 16 most actively traded currencies tracked by Bloomberg after Lloyds Banking Group ceded control to the government in return for state guarantees covering 260 billion pounds ($367 billion) of risky assets. Sterling lost as much as 2.5 percent to $1.3743, the lowest level since Jan. 26, and declined 1.8 percent to 91.47 pence against the euro.

Resisting Calls

The euro may extend losses against the dollar as European finance ministers resist doing more to boost their economies even as the World Bank forecasts the biggest global recession since World War II.

“We take the view that we don’t need to make a further effort,” Luxembourg Finance Minister Jean-Claude Juncker told reporters after leading a meeting of euro-area finance chiefs in Brussels yesterday. Germany’s Peer Steinbrueck said his government is “not discussing any additional measures” to boost Europe’s largest economy.

European Central Bank President Jean-Claude Trichet said at a press conference in Basel, Switzerland, that the world may be approaching a turning point and that measures taken by central banks and governments should stimulate economic growth.

“This is a cue to sell the euro because it tells the market you might be underestimating the severity of the situation and already the ECB is thought to be slightly behind the curve,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. The ECB is probably “hoping for the euro to go lower because it allows them to not have to cut rates so much,” he said.

The ECB reduced its main refinancing rate last week to 1.5 percent, the lowest level since the made its debut in 1999. The Federal Reserve’s target is in a range of zero to 0.25 percent.