Dollar, Yen May Extend Gains as Economic Outlook Spurs Demand

June 4 (Bloomberg) -- The dollar and the yen may rise for a second day versus the euro on speculation an economic recovery will be too weak to sustain gains in higher-yielding assets such as stocks, encouraging demand for safety.

The dollar advanced versus 10 of the 16 most-traded currencies today after reports yesterday showed U.S. companies cut more jobs last month than economists forecast and Europe’s economy contracted at the fastest pace in 13 years. Japanese companies cut spending for an eighth straight quarter, the Ministry of Finance said today. The euro was little changed before today’s European Central Bank meeting at which policy makers are due to disclose details of plans to buy covered bonds.

“The financial market has become overly optimistic about the global economy,” said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. That is why the dollar and the yen may strengthen today, he said.

The dollar traded at $1.4156 per euro as of 9:05 a.m. in Tokyo, from $1.4162 yesterday in New York, when it climbed 1 percent. The yen was at 135.87 per euro from 135.93 yesterday. The dollar bought $1.6312 per British pound from $1.6317 and was little changed at 95.97 yen from 95.99 yen.

The U.S. currency may strengthen to as high as $1.4050 per euro today, Rennie said.

The VIX Index, a measure of market volatility known as Wall Street’s “fear gauge,” rose 4.7 percent yesterday, the most in a week, to 31.02, indicating traders are becoming less confident in stock-market advances.

ECB Policy

Europe’s Dow Jones Stoxx 600 Index slipped 2 percent yesterday after the European Union’s statistics office reported the euro area’s economy contracted 2.5 percent in the first quarter, the most since the data were first compiled in 1995.

ECB policy makers will hold the main refinancing rate at 1 percent at today’s meeting, according to the median forecast of economists surveyed by Bloomberg News.

The ECB said last month it would buy 60 billion euros ($85 billion) of covered bonds, debt issued by banks and backed by mortgages or public-sector loans.

Demand for the dollar may increase after Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate.

‘Printing Money’

“Bernanke told Congress that the Fed won’t accommodate wider budget deficits by simply printing money, clearly attempting to reassure foreign investors worried about the U.S. dollar’s ‘safe haven’ status,” John Kyriakopoulos, Sydney-based head of currency strategy at National Australia Bank Ltd. wrote in a research report.

A government report tomorrow will show the U.S. jobless rate rose to 9.2 percent in May, the highest in more than 25 years, according to a Bloomberg survey of economists.

ADP Employer Services yesterday reported U.S. companies cut 532,000 jobs last month. The median forecast of economists surveyed by Bloomberg News was for a reduction of 525,000.

“You’re going to see money flowing to the dollar,” said Alan Kabbani, a senior currency trader at Wachovia Corp. in Charlotte, North Carolina. “We’re going to see a very mild recovery.”

Japanese capital spending excluding software dropped 25.4 percent in the quarter ended March 31 from a year earlier, compared with an 18.1 percent decline the previous three months, the Ministry of Finance said in Tokyo.