Yen Weakens Versus Euro as Stock Gains Spur Higher-Yield Demand

May 15 (Bloomberg) -- The yen fell for a second day against the euro as a gain in U.S. stocks encouraged investors to buy higher-yielding assets with funds borrowed in Japan.

The yen weakened against 15 of the 16 most-traded currencies as optimism about a global economic recovery pushed stocks higher and damped demand for safer assets. Gains in the euro may be limited before a European report today that economists say will show the region’s economy contracted at the fastest pace in at least 13 years.

“Gains in stocks, which are the primary gauge of risk- appetite, mean that the yen will weaken,” said Yousuke Hosokawa, a senior currency dealer in Tokyo at Chuo Mitsui Trust & Banking Co., a unit of Japan’s seventh-largest banking group. “While recent data have begun to sound an alarm about the optimistic scenario for the global economy, stocks have not been too worried about it.”

The yen declined to 130.84 per euro as of 8:56 a.m. in Tokyo from 130.67 in New York yesterday, paring its weekly gain to 2.6 percent. The dollar traded at 95.98 yen from 95.80. The euro bought $1.3628 from 1.3639.

Australia’s currency gained to 72.87 yen from 72.82 as a drop in a gauge of currency volatility reduced the risk of losses from so-called carry trades. JPMorgan Chase & Co.’s index of investor expectations for currency swings, known as implied volatility, fell to 14.39 percent yesterday, from 14.56 percent on May 13.

Carry Trades

Currency fluctuations can wipe out gains from carry trades, in which investors borrow funds in a country with low interest rates and buy assets where they expect to earn a higher return. Australia’s benchmark lending rate is 3 percent compared with near zero in the U.S. and 0.1 percent in Japan. New Zealand’s official cash rate is 2.5 percent.

The Standard & Poor’s 500 Index climbed 1 percent yesterday and the MSCI World Index added 0.1 percent even after a U.S. government report showed first-time claims for unemployment insurance rose more than economists forecast.

“The fact that there’s no reaction in the market to negative news is a fairly robust signal that there are not a lot of people willing to be very bearish,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “It’s a positive signal for risk taking.”

Initial jobless claims in the U.S. increased to 637,000 in the seven days ended May 9 from 605,000 a week earlier, the Labor Department reported. The median forecast of economists surveyed by Bloomberg was for an advance to 610,000.

The euro is still headed for the first weekly drop in three weeks against the yen before a report that economists say will show that gross domestic product in the euro region fell 2 percent in the first quarter from the previous three months, according to a Bloomberg News survey. The European Union’s statistics office will release the report today.

The yen was little changed after a government report showed orders for Japanese machinery, an indicator of capital investment in the next three to six months, fell 1.3 percent in March from February, less than the median forecast for a 4.6 percent drop in a Bloomberg survey of economists.