Dollar, Yen Fall Most Since May on Economic Outlook, Earnings

July 18 (Bloomberg) -- The dollar and the yen posted the biggest declines against the euro since May as corporate earnings topped forecasts and U.S. reports showing gains in housing and a slower decline in industrial production.

The Canadian dollar advanced to a one-month high against the greenback as crude oil rebounded. The Mexican peso had the biggest gain in two months this week after policy makers said yesterday that they will “pause” after cutting the overnight interest rate a quarter percentage point to 4.5 percent.

“There has been a pretty decent rebound in risk appetite,” said Samarjit Shankar, director of global strategy in Boston at Bank of New York Mellon Corp., the world’s largest custodial firm. “We’ve seen most global market participants venture back into the higher-yielding bond markets and also emerging markets on the equity side. There’s been a relative move from the safety of the yen and the dollar.”

The U.S. currency fell 1.2 percent to $1.4102 per euro yesterday, from $1.3936 on July 10. The yen lost 3 percent to 132.85 per euro, from 129 a week earlier. The declines were the biggest since the five-day period ended May 22. The Japanese currency fell 1.8 percent to 94.19 per dollar.

The Mexican peso rebounded from a 2 1/2 month low, rising 2.6 percent this week to 13.34 per dollar. The central bank signaled it may hold off on further rate cuts after lowering after lowering the rate a seventh straight month yesterday.

Equity Rebound

The yen lost 6.4 percent against the Canadian dollar and the greenback fell 3.6 percent versus the Brazilian real after stocks advanced worldwide, reducing demand for the U.S. and Japanese currencies as a haven from the global recession.

The Standard & Poor’s 500 Index rose 6.97 percent in its biggest rally since March as companies from Goldman Sachs Group Inc. to Intel Corp. and Johnson & Johnson reported results that topped analysts’ estimates. Reports this week showed the decline in the U.S. industrial production slowed in June, and the U.S. housing starts rose to the highest level since November.

“The currencies of emerging markets and resource-rich nations fare well against the dollar and the yen when stocks are on the rising trend, reflecting optimism about the economy,” said Yuji Kameoka, a strategist in Tokyo at Daiwa Institute of Research Ltd., a unit of Japan’s second-largest brokerage group.

Investors should sell the greenback against the Canadian dollar, the Hungarian forint and the British pound as higher- than-expected corporate earnings encourage the purchase of riskier assets, John Normand, head of global currency strategy in London at JPMorgan Chase & Co. wrote in a research note yesterday.

Monetary Policy

The dollar has been trading with 3 cents above and below $1.40 per euro since June 3, when it reached a six-month low of $1.4338, as investors debated whether the global recovery is sustainable.

Most Federal Reserve officials judged the economy at risk to further shocks last month, the central bank said in minutes of the June 23-24 meeting released this week. Fed Chairman Ben S. Bernanke will deliver his semi-annual monetary policy report before Congress on July 21.

“We’ll continue to have the push-and-pull between inflation and deflation, between flight-to-quality and global risk seeking,” said Mark Rzepczynski, managing director at Lakewood Partners, a fund management firm in Boston.

‘Excessive Movements’

The yen appreciated against 13 of 16 most actively traded currencies in the past month, rising 1 percent versus the Mexican peso. The yen is weaker against the entire group this year.

Japan’s new top currency official said yesterday the government would consider stepping into the foreign-exchange market if abrupt yen moves hurt the economy.

“We’ll make judgments based on whether excessive movements in the currency market will adversely affect the economy,” Rintaro Tamaki, vice finance minister for international affairs, said in a Tokyo yesterday.

The Canadian dollar appreciated the most of the 16 major currencies against the yen this week, rising 6.4 percent to 84.60 yen, as crude oil gained 6 percent to $63.51 a barrel.

Investors should buy the Canadian dollar against the yen because risk appetite is improving and Japan’s currency may suffer from political uncertainty, according to Citigroup Inc.

Citigroup entered a so-called long Canadian dollar position against the yen and expects it will reach 90 yen, a team of strategists wrote in a research note on July 16. In a long position, a trader or investor buys a currency on bet it will appreciate.

The Bank of Canada is likely to keep its key interest-rate at 0.25 percent on a policy meeting on July 21, according to the median forecast of 20 economists surveyed by Bloomberg News.