Yen, Dollar Fall on Speculation Goldman Sachs Profit Will Surge

July 13 (Bloomberg) -- The yen and the dollar weakened on speculation Goldman Sachs Group Inc. will report the largest profit since it set earnings records in 2007, reviving demand for higher-yielding assets.

The yen fell against all 16 major currencies after the opposition Democratic Party of Japan won Tokyo elections yesterday, spurring concern that political uncertainty in the world’s second-largest economy will worsen. The euro rose versus the dollar and the yen on prospects European Central Bank President Jean-Claude Trichet will today signal policy makers will refrain from cutting interest rates.

“There is a possibility that this week’s quarterly results from U.S. banks may help counter the emerging pessimism about corporate earnings,” said Kazutoshi Yasuda, general manager of the markets department at FX Prime Corp., a foreign-exchange unit of Japanese trading house Itochu Corp. “The recent buying of the yen due to risk aversion may come to a halt.”

The yen dropped to 129.44 per euro as of 10:37 a.m. in Tokyo from 129.00 in New York on June 10, when it completed the biggest weekly gain since May 15. The dollar weakened to $1.3959 per euro from $1.3936. The yen traded at 92.71 versus the dollar from 92.54.

Goldman Sachs will tomorrow say it earned $2.2 billion, or $3.57 per share, in the three months through June 30, according to the average estimate of analysts surveyed by Bloomberg.

Goldman Revenue

Goldman’s trading revenue in 2009 will top its 2007 record as the firm profits from reduced competition after the collapse of rivals, including Lehman Brothers and Bear Stearns Cos., according to Bank of America analyst Guy Moszkowski in New York.

The dollar declined against 11 of the major currencies after a finance official in Japan’s opposition party said the nation should consider diversifying its foreign reserves away from the dollar and buy International Monetary Fund bonds.

“In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9. “Many countries are starting to diversify their reserves.”

The DPJ overtook Prime Minister Taro Aso’s Liberal Democratic Party to become the biggest party in Tokyo’s city assembly in elections yesterday, less than two months before national polls must be called. Nakagawa’s views contrast with those of the LDP, which favors buying U.S. government debt.

Japan holds $1.02 trillion in foreign reserves, the world’s second-largest holder of the U.S. debt after China.

China, India, Brazil, Mexico and South Africa last week questioned the role of the U.S. dollar as the primary denomination of world reserves. In China, whose foreign-exchange reserves probably topped $2 trillion for the first time in the three months to June 30, Premier Wen Jiabao this year said he was concerned that his nation’s dollar assets may decline as the U.S. sells record amounts of debt to fund stimulus spending.