Yen Rises as Economic Concerns Damp Demand for Higher Yields

Oct. 28 (Bloomberg) -- The yen gained against major counterparts on speculation the global economic recovery will slow, reducing demand for high-yielding assets.

The yen traded near a one-week high against the euro before reports this week forecast to show German consumer prices and unemployment worsened, backing the case for the European Central Bank to keep interest rates low. Australia’s dollar fell toward a one-week low after a government report showed annual inflation slowed, easing pressure on the central bank to accelerate interest-rate increases.

“As the market shifts attention to the sustainability or the strength of a recovery from a cyclical upturn, the mood of euphoria may wane,” said Masahide Tanaka, senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second- largest bank. “The risk of unwinding, of a capital flight into higher-yielding currencies, may increase.”

The yen rose to 135.55 per euro as of 10:03 a.m. in Tokyo from 135.89 in New York yesterday, after earlier reaching 135.43, the highest level since Oct. 21. Japan’s currency fetched 91.50 per dollar from 91.80. The dollar traded at $1.4813 per euro from $1.4804 yesterday, when it touched $1.4770, the strongest level since Oct. 13.

Australia’s currency lost 0.2 percent to 91.47 U.S. cents. It fell 0.6 percent to 83.60 yen.

The Conference Board’s consumer confidence index dropped to 47.7 in October from a revised 53.4 in the previous month, the New York-based research group reported yesterday. The median forecast of 74 economists in a Bloomberg survey was for an advance to 53.5.

German Prices

The German jobless rate probably rose to 8.3 percent in October from 8.2 percent in the previous month, according to a Bloomberg News survey of economists before the report tomorrow.

German consumer prices, calculated using a harmonized European Union method, fell 0.1 percent in October from a year earlier after slipping 0.5 percent in September, according to a Bloomberg News survey of economists. The Federal Statistics Office in Wiesbaden will release the report later today.

“We expect German CPI to remain weak,” Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG, wrote in a research note yesterday. “We continue to target the euro- dollar back at $1.45 in one month as sentiment is clearly showing signs of strain.”

The ECB will maintain its benchmark interest rate at 1 percent through the second quarter of 2010, a separate Bloomberg survey showed. The central bank next meets on Nov. 5.

Australia’s consumer price index advanced 1 percent from the second quarter, when it gained 0.5 percent, the Bureau of Statistics said in Sydney today. The median estimate of 20 economists surveyed by Bloomberg News was for a 0.9 percent increase. Prices gained 1.3 percent from a year earlier.

Unsustainable Rally

The yen rose against all 16 of the most-active currencies on speculation a rally in stocks and commodities can’t be sustained.

The six-month rally in shares and raw materials is probably at its peak as U.S. growth lags behind historical averages, according to Bill Gross at Newport Beach, California-based Pacific Investment Management Co.

Gross, a founder and co-chief investment officer of the world’s biggest manager of bond funds, has predicted a “new normal” in the global economy that will include heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

“What has happened is that our ‘paper asset’ economy has driven not only stock prices, but all asset prices higher than the economic growth required to justify them,” Gross wrote yesterday on Pimco’s Web site.

The Standard & Poor’s 500 Index slipped 0.3 percent to 1,063.41 yesterday in New York. The Nikkei 225 Stock Average fell 0.8 percent today.

Geithner Comments

Adding to signs the recovery will be slow, Japan’s retail sales fell for a 13th month in September, the Trade Ministry said today in Tokyo. Sales slid 1.4 percent from a year earlier,. The median estimate of 13 economists surveyed by Bloomberg was for a 1.6 percent decline.

Gains in the dollar may be tempered after U.S. Treasury Secretary Timothy Geithner said he expects the government will receive repayment “relatively quickly” from most of the big banks helped by the $700 billion financial rescue program.

“I expect you’re going to see a lot of the rest of the money out in the system there come back relatively quickly,” Geithner said yesterday in New York at a conference of the Securities Industry and Financial Markets Association. The organization is a trade group that includes Goldman, Sachs & Co., Banc of America Securities LLC and State Street Corp.