Yen, Dollar Rise as U.S. Sentiment Encourages Demand for Refuge

July 10 (Bloomberg) -- The yen and dollar advanced against the euro and Japan’s currency headed for its biggest weekly gain since May as a bigger-than-forecast slide in a gauge of U.S. consumer confidence this month encouraged demand for a refuge.

The Swiss franc dropped against the dollar after the central bank’s President Jean-Pierre Roth said policy makers will continue to buy foreign currencies if needed to stop its appreciation. Russia’s ruble fell the most versus the dollar since February after Bank Rossii cut interest rates and oil prices dropped below $60 a barrel.

“The general theme is the continued rally in the yen and dollar, which reflects more risk aversion,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank. “The green-shoots recovery story is getting ahead of itself.”

The yen appreciated 1.2 percent to 128.81 per euro at 3:12 p.m. in New York, from 130.36 yesterday. The dollar gained 0.5 percent to $1.3948 per euro from $1.4020. The yen advanced 0.7 percent to 92.32 per dollar from 92.99. It earlier touched 91.79, the strongest level since February.

Japan’s currency rose 4.1 percent versus the euro this week in the biggest rally since the five days ended May 15 as investors pared expectations the recession will end soon. The yen gained 3.8 percent versus the dollar, the biggest weekly advance since Oct. 24, while the greenback advanced 0.4 percent versus the euro.

Barclays’s Outlook

Barclays Capital lowered its one-month forecast for the dollar against the yen to 96 from 98 “in light of recent price action.” It maintains that the drop of the dollar this week is “temporary” as the global economy continues to “improve,” while the Japanese outlook is too “fragile” to sustain a stronger currency, currency strategists Yuki Sakasai in Tokyo and Paul Robinson in London wrote in a note to clients today.

The ruble slid as much as 3.2 percent to 32.8190 against the dollar, its biggest drop in almost five months and the largest decline among emerging-market currencies, after the central bank lowered the refinancing rate to 11 percent. The ruble also dropped as crude oil, Russia’s largest export, fell more than 10 percent this week.

The Swiss franc lost 0.7 percent to 1.0862 versus the dollar and fell as much as 0.3 percent to 1.5168 against the euro before trading little changed after Roth told the German newspaper Handelsblatt that “we stick to our policy in a decisive manner” regarding the campaign to weaken the currency.

The Swiss National Bank sold the franc on March 12 to stem its gains and support the economy, pushing it down a record 3.3 percent versus the euro.

U.S. Sentiment

The yen and dollar gained versus the euro as a gauge of confidence among U.S. consumers dropped in July after four months of increases. The Reuters/University of Michigan index of consumer sentiment fell to 64.6 from 70.8 last month. The median forecast of 59 economists surveyed by Bloomberg News was for a decrease to 70.

The U.S. trade deficit unexpectedly narrowed in May to $26 billion, the lowest level since November 1999, from a revised $28.8 billion in the prior month that was lower than previously estimated, the Commerce Department reported today.

“Our long-term views have become less dollar-bearish on the back of a lower U.S. trade deficit,” Themos Fiotakis, a London-based analyst at Goldman Sachs Group Inc., wrote in a research note to clients today.

Goldman Sachs’s View

Goldman Sachs lowered its forecast this week for the dollar versus major counterparts in the next three months, while boosting its one-year estimate as “aggressive” easing by the Federal Reserve comes to an end.

The dollar will decline to $1.45 per euro in three months, before appreciating to $1.35 in a year, according to Goldman Sachs’s forecast.

The yen headed for its biggest weekly gain against the Australian dollar since October, appreciating 6.5 percent to 71.89 on signs Japanese investors are losing appetite for overseas assets. It was up 4.3 percent this week to 57.99 against the New Zealand dollar.

Pacific Investment Management Co., which runs the world’s biggest bond fund, said investors who avoid Japanese government securities may miss out on a rally.

“There is a huge risk not holding bonds,” Tomoya Masanao, a Pimco executive vice president in Tokyo, said in an interview on July 8. “The growth rate won’t rise much, and inflation will remain low.” Newport Beach, California-based Pimco manages $756 billion in assets.

Investors have been “relatively quick” to cut their losses in commodity currencies, such as the Australian dollar, setting the stage for a rebound on “improving fundamentals,” according to the Barclays’ research note.

Investors monitored by Barclays have “decidedly” turned to “dollar buying” since early June to cut “risky” assets, the firm said.