Yen, Dollar May Extend Gain as Stock Decline Damps Yield Demand

May 12 (Bloomberg) -- The yen and dollar may extend gains versus the euro on speculation a decline in stocks will reduce demand for higher-yielding assets.

The euro, which rose the most against the dollar in almost two months on May 8, dropped yesterday after its 14-day relative strength index approached 70, signaling a change in direction may be imminent. Australian’s dollar may add to losses from its highest level in seven months against the U.S. currency on concern a decline in crude oil and commodity prices will weaken demand for the currency.

“The foreign-exchange market continues to live and die by fluctuations of stock prices, which are a key barometer of risk- appetite,” said Tomohiro Nishida, a foreign-exchange dealer at Chuo Mitsui Trust & Banking Co. in Tokyo. “The yen and dollar are a buy against higher-yielding currencies when stocks are falling.”

The yen traded at 132.51 per euro as of 8:16 a.m. in Tokyo from 132.40 in New York yesterday when it touched 134.82, the weakest level since April 7. The dollar was at $1.3590 per euro from $1.3582. It slid to $1.3668 yesterday, the lowest since March 24. The U.S. currency bought 97.51 yen from 97.48.

Canada’s currency traded at C$1.1648 per U.S. dollar following a 1.5 percent decline against the greenback yesterday when the Standard & Poor’s 500 Index fell 2.2 percent. The loonie reached C$1.1477 yesterday, the strongest since Nov. 5.

Commodity Currencies

The Canadian dollar rose 10 percent in the past two months as evidence the worst of the global recession may be over encouraged investors to buy currencies of commodity producers that stand to benefit from a recovery. Commodities such as oil and gold account for half of Canada’s exports.

“The currency markets are clearly pricing in a recovery, reflation story right now,” said Bilal Hafeez, global head of foreign-exchange strategy in London at Deutsche Bank AG, the world’s largest currency trader, in an interview on Bloomberg Television. “The currencies you want to be in are the ones that are growth-sensitive.”

Australia’s dollar, which also benefits from a recovery of global demand because of heavy reliance on shipments of resource and commodity products, was at 75.94 U.S. cents from 75.86 cents yesterday when it dropped 1.3 percent.

The euro gained 2.7 percent versus the dollar last week, the most since the week ended March 20, on speculation the European Central Bank’s plan to buy 60 billion euros ($81.5 billion) in covered bonds won’t debase the currency. President Jean-Claude Trichet told reporters in Frankfurt on May 7 the purchase of the debt is a “credit easing.”

The European currency’s 14-day relative strength index was at 62.92 yesterday, compared with 64.72 at the end of last week. The last time the index was in the middle 60s was after the Fed’s announcement in March.