Yen, Dollar Advance on Concern Situation in Iran Is Worsening

June 22 (Bloomberg) -- The yen gained for the first time in four days versus the euro and the dollar rose on concern Iran’s political situation is deteriorating after a week of clashes between police and protesters, spurring demand for safer assets.

The yen climbed versus all 16 major currencies as the number of people killed in Iran increased 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 against the greenback and the yen as stocks pared gains, prompting investors to reduce holdings of 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 133.44 per euro as of 12:03 p.m. in Tokyo from 134.18 in New York last week, when it gained 0.6 percent. Japan’s currency strengthened to 95.93 per dollar from 96.27. The dollar climbed to $1.3909 per euro from $1.3937.

The Nikkei 225 Stock Average pared gains to 0.1 percent from as much as 0.4 percent, and Standard & Poor’s 500 Index futures were little changed.

Japan’s currency gained 1.1 percent to 76.79 versus the Australian dollar and climbed 1 percent to 61.25 to the New Zealand dollar as splits within Iran’s ruling elite deepened. Parliament Speaker Ali Larijani yesterday criticized the top election body for siding with President Mahmoud Ahmadinejad and said most Iranians don’t accept Ahmadinejad’s electoral victory.

Demand for Refuge

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.

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, gained 0.2 percent to 80.422.

“We are seeing risk aversion creeping back into the market,” said Mitul Kotecha, Hong Kong-based head of global foreign-exchange strategy at Calyon, a unit of France’s Credit Agricole SA. “Equity markets are really struggling at the moment. When equity markets struggle, the U.S. dollar generally benefits.”

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.

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.

“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.

Forecast Disarray

Analyst forecasts about the dollar have become the most scattered in two years, driving up foreign-exchange price swings and increasing risks that trading strategies and corporate hedges will backfire.

Redtower Asset Management, an Aberdeen, Scotland, investment adviser, sees the currency strengthening to $1.16 per Euro by year’s end, from $1.3906 today, as the world economy recovers from the first global recession since World War II. Standard Chartered Plc predicts a more stable economy will weaken the dollar to $1.55 as the Federal Reserve keeps its benchmark interest rate near zero to sustain growth, prompting investors to sell greenbacks for higher-returning assets.

Higher Volatility

The 39-cent gap between the high and low calls in Bloomberg’s strategist survey is almost double August 2007’s 20- cent divide. Wider fluctuations increase the risk for so-called carry trades, where money borrowed from countries with low rates is used to invest for higher yields. A move to unwind such investments probably would drive down the Brazilian real, South African rand and other developing nations’ currencies.

“It’s usually in this environment when volatility starts to pick up, before you have a real big move toward one camp,” said Paresh Upadhyaya, who helps manage $21 billion in currencies as senior vice president at Putnam Investments in Boston. “The dollar’s at a critical juncture, and to me it’s a sign we’re going to see a more significant move one way or the other.”