Yen, Dollar Advance on Concern Situation in Iran Is Worsening

June 22 (Bloomberg) -- The yen and the dollar rose against the euro on concern the political situation in Iran is deteriorating following a week of clashes between police and protesters, spurring demand for safer assets.

The yen climbed versus all 16 major currencies after the number of people killed in Iran rose to at least 17 and security forces detained five members of former President Ali Akbar Hashemi Rafsanjani’s family, adding to signs the divisions in the ruling regime are widening. The Australian and New Zealand dollars fell the most as Asian stocks reversed gains, prompting investors to sell higher-yielding securities.

“There is growing uncertainty over what will happen in Iran that seems to be sparking risk aversion,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-largest bank. “This would be supportive of the yen.”

The yen advanced to 133.36 per euro as of 10:56 a.m. in Tokyo from 134.18 in New York last week, when it gained 0.6 percent. Japan’s currency advanced to 95.90 per dollar from 96.27. The dollar climbed to $1.3905 per euro from $1.3937.

The Nikkei 225 Stock Average fell 0.1 percent, after earlier gaining as much as 0.4 percent. The MSCI Asia Pacific Index of regional shares excluding Japan declined 0.3 percent.

Japan’s currency strengthened 1.1 percent to 76.76 versus the Australian dollar and climbed 0.8 percent to 61.36 to the New Zealand dollar as splits within Iran’s ruling elite deepened. Parliament Speaker Ali Larijani criticized the top election body for siding with President Mahmoud Ahmadinejad and said most Iranians don’t accept Ahmadinejad’s electoral victory.

The yen typically strengthens in times of financial turmoil as Japan’s trade surplus makes the currency attractive as it means the nation does not have to rely on overseas lenders. The dollar benefits as it is the world’s reserve currency.

Currency Volatility

Volatility implied by one-month euro options against the yen rose to 17.5 percent from 17.1 percent on June 19, indicating a greater risk of exchange-rate fluctuations that can erode profit on so-called carry trades.

In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates. The risk is market moves can erase those profits. The benchmark interest rate is 0.1 percent in Japan, compared with 3 percent in Australia and 2.5 percent in New Zealand.

Losses in the euro were tempered before a German report that economists said will show business confidence rose to the strongest in seven months, adding to signs the global economy is emerging from recession.

‘Expected to Improve’

“German sentiment is expected to improve, implying the European Central Bank may leave rates unchanged next month,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-biggest bank. “The euro will probably strengthen.”

The Ifo institute in Munich will say today its business climate index, based on a survey of 7,000 executives, increased to 85 this month from 84.2 in May, according to a Bloomberg News survey, showing signs the recession in Europe’s largest economy is easing. The index fell to a 26-year low of 82.2 in March.

The ECB last month kept its benchmark interest rate at a record low of 1 percent. It will offer to lend banks as much money as they want for 12 months in a new auction this week to help get credit flowing again.