Dollar, Yen May Weaken as Retail Gain Spurs Higher-Yield Demand

June 12 (Bloomberg) -- The dollar and yen may extend their declines versus the euro after a gain in U.S. retail sales and a drop in initial jobless claims encouraged investors to buy higher-yielding assets.

The euro headed for a weekly advance against the U.S. currency before reports from the Europe and U.S. today that economists say will show industrial output declined at a slower pace in the 16-nation area and consumer confidence improved in the world’s largest economy. The Canadian dollar and Norwegian krone may strengthen against the greenback after crude oil climbed above $73 a barrel yesterday for the first time in more than seven months.

“As expectations that the U.S. economy is bottoming out of the recession are growing, risk appetite is recovering,” said Masahide Tanaka, senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank. “Risk money continues to fly into stocks, commodities and higher-yielding currencies, shifting away from” the dollar and the yen, he said.

The dollar traded at $1.4108 per euro as of 8:07 a.m. in Tokyo, from $1.4108 yesterday in New York. The U.S. currency has fallen 1 percent this week. The euro bought 137.77 yen from 137.74. The U.S. currency was at 97.64 yen from 97.63.

Canada’s dollar traded at C$1.1022 to the U.S. currency from C$1.1025 and Norway’s krone was at 6.2971 per dollar from 6.3221 after crude oil, the two nations’ largest export earner, climbed for a third day yesterday.

IMF Forecast

The International Monetary Fund raised its forecast for global growth in 2010 to 2.4 percent from 1.9 percent, a person familiar with the matter said yesterday. The World Bank predicted the global economy will shrink “close to 3 percent” this year, almost double what it projected in March.

In the U.S., government reports showed yesterday retail sales increased 0.5 percent last month and initial jobless claims dropped last week to the lowest level since January.

European industrial production probably fell 19.8 percent in April from a year earlier, an improvement from a record drop of 20.2 percent in the previous month, according to a Bloomberg News survey of economists before the European Union’s statistics office releases the data in Luxembourg.

The Reuters/University of Michigan preliminary sentiment gauge for June climbed to 69.5, the highest reading since September, from 68.7 in May, according to a separate Bloomberg survey before today’s report.

Reserve Status

The dollar declined 6.6 percent versus the euro last month, the biggest monthly drop this year, on speculation the quadrupling of the U.S. budget deficit and the Fed’s increase of the money supply will undermine the role of the greenback as the world’s main reserve currency.

Bank of China Ltd. intends to cut the ratio of foreign- currency assets it holds by making more new yuan loans in response to the global financial crisis and economic uncertainties, the Wall Street Journal said today, citing Xiao Gang, the lender’s chairman.

The state-controlled bank aims to reduce foreign-currency assets in its portfolio by between 10 and 15 percentage points “over the next few years,” from the current 35 percent, the report cited Xiao as saying in an interview.

Russia and Brazil announced plans on June 10 to buy bonds from the IMF and diversify foreign-currency reserves. China is expected to purchase as much as $50 billion of the bonds, IMF Managing Director Dominique Strauss-Kahn said this week.

The dollar’s status as the world economy’s main reserve currency may deteriorate, Nouriel Roubini, a New York University economics professor who predicted the financial crisis, said at a conference in Athens yesterday.

While it’s “not going to happen overnight,” the development “will diminish the role of the dollar over time,” Roubini said.