Yen Rises as Drop in U.S. Stocks Spurs Demand for Safety Assets

April 7 (Bloomberg) -- The yen gained from five-month lows against the dollar and euro after U.S. stocks ended a four-day rally, spurring speculation that global stocks will slide and boost demand for safer assets.

The Japanese yen rose against both currencies for the first time in almost a week after a Calyon Securities analyst said loan losses at banks will exceed levels from the Great Depression. Australia’s dollar slumped for a third day as traders increased bets that the Reserve Bank of Australia will reduce its key interest rate from the lowest level in 45 years.

“Declines in equity markets may weaken capital inflow into higher-yielding currencies” and benefit the yen, said Tomohiro Nishida, a foreign-exchange dealer at Chuo Mitsui Trust and Banking Co. in Tokyo. “As the quarterly reporting season is coming closer, the market may need to re-assess reality.”

The yen advanced to 134.30 per euro as of 8:39 a.m. in Tokyo from 135.49 late yesterday in New York. Japan’s currency gained to 100.66 per dollar from 100.99.

The greenback traded at $1.3344 against the euro from $1.3416. Australia’s dollar fell for a third day against the U.S. currency, slipping to 70.90 U.S. cents from 71.39 cents yesterday. New Zealand’s dollar declined to 58.04 U.S. cents from 58.83, halting a four-day advance.

The Standard & Poor’s 500 Index dropped 0.8 percent after Mike Mayo, a bank analyst at Calyon, assigned an “underweight” rating to U.S. banks including Winston-Salem, North Carolina- based BB&T Corp. and Cincinnati’s Fifth Third Bancorp. Losses on banks’ non-mortgage loans such as credit-card debt will probably accelerate, he wrote in a report yesterday.

Financial Panic “Abating”

The Dollar Index, used by the ICE to track the greenback against the currencies of six major U.S. trading partners, increased 0.5 percent to 84.571 yesterday. The gauge dropped 2.9 percent in March.

“The market bought risky assets aggressively in a short period, making it prone to a pullback,” said Steven Englander, chief U.S. currency strategist at Barclays Capital in New York. “There’s always the prospect for reconsideration.”

Federal Reserve Governor Kevin Warsh said yesterday the financial turmoil that has prompted one of the worst recessions in the postwar period is showing signs of ending, though growth may remain below normal for some time.

“This panic is showing meaningful signs of abating,” Warsh said in Washington. Still, growth “is on track to contract sharply again in the first quarter, which would put the current contraction among the most severe post-World War II recessions.”

RBA Decision

Traders are betting the RBA will cut its key borrowing rate by at least 50 basis points, according to a Credit Suisse Group index based on swaps trading. The index yesterday indicated a 38 percent chance of a reduction of that size.

The Australian dollar has advanced 12 percent since the RBA left its benchmark rate on hold at 3.25 percent on March 3. New Zealand’s target rate is 3 percent.

Bank of Japan Governor Masaaki Shirakawa and his colleagues will keep the target lending rate at 0.1 percent today, according to 25 of 26 economists surveyed by Bloomberg News before the bank’s announcement in Tokyo.

The Federal Reserve and four other central banks announced a currency swap arrangement that will give the U.S. central bank access to as much as $285 billion in euros, yen, British pounds and Swiss francs.

“Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets,” the Fed said in a statement yesterday.