Yen, Dollar Gain as Economic Concern Discourages Risk Demand

Jan. 15 (Bloomberg) -- The yen and dollar rose against most of their major counterparts as stocks dropped and investors questioned the strength of the global economic recovery, discouraging demand for higher-yielding assets.

The euro fell the most in almost a month versus the dollar as Greece’s struggle to cut its budget deficit reduced investor confidence in European assets. Australia’s dollar and Norway’s krone dropped as concern China’s banks are reducing property loans slowed demand for the nations’ raw materials.

“What is coming out is not really enough to convince either bulls or bears on the economy,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG. “We’ve seen a bit of a spike in risk aversion again.”

The yen advanced 1.2 percent to 130.61 per euro at 5:08 p.m. in New York, from 132.25 yesterday, after reaching 130.31, the strongest level since Dec. 22. The euro dropped 0.8 percent to $1.4387, from $1.4499. It slid as much as 1.1 percent, the biggest intraday loss since Dec. 17. The 16-nation currency will fall to $1.40 by the end of March, according to Gullberg. The dollar decreased 0.5 percent to 90.77 yen, from 91.21. It touched 90.60, the lowest level since Dec. 21.

New Zealand’s currency fell 1.1 percent to 66.99 yen and the Brazilian real slid 0.7 percent to 1.7723 per dollar on speculation investors will reduce carry trades, in which they buy higher-yielding assets with amounts borrowed in nations with low interest rates. The benchmarks of 0.1 percent in Japan and zero to 0.25 percent in the U.S. have made the yen and dollar popular for funding such transactions.

China’s Lending

China’s banks are only interested in making loans for residential developments, the Guangzhou-based 21st Century Business Herald said on its Web site. The banks aren’t extending loans for luxury homes and commercial developments, said the newspaper, citing unidentified commercial bank officials.

The People’s Bank of China unexpectedly said this week it will increase the proportion of deposits the nation’s lenders must set aside as reserves in an effort to rein in growth.

“China is beginning to show signs of tightening, which should lead to risk aversion,” said Yoshihiro Nomura, a Tokyo- based foreign-exchange team manager at Trust & Custody Services Bank Ltd. “Investors are sensitive to China’s news. I wouldn’t be surprised if the euro-yen were to drop further.”

The Standard & Poor’s 500 Index fell 1.1 percent today on the economic and business outlook.

Weaker Aussie

Australia’s currency fell 1.0 percent to 92.28 U.S. cents and the krone depreciated 0.9 percent to 5.6803 per dollar as the price of raw materials fell. Commodities account for more than half of Australia’s overseas shipments, while crude oil is Norway’s biggest export.

The dollar posted a second weekly loss against the yen, dropping 2 percent as traders added to bets the Federal Reserve will keep interest rates at almost zero to revive growth.

U.S. consumer prices rose 0.1 percent in December after a 0.4 percent advance in the previous month, the Labor Department reported today. The median forecast of 77 economists in a Bloomberg News survey was for a 0.2 percent increase.

The Reuters/University of Michigan preliminary index of consumer sentiment increased this month to 72.8, from 72.5 in December. The median forecast of 68 economists in a Bloomberg survey was for a reading of 74.

“My worry is about whether we’re going to have a sustainable recovery,” Justin Lin, World Bank chief economist, said yesterday to the Council on Foreign Relations in Washington. “I think a second dip is a very likely scenario.”

Fed Rate View

Futures on the CME Group exchange show a 27 percent chance the Fed will raise its target lending rate by at least a quarter-percentage point by its June meeting, down from almost 55 percent odds a month ago.

The euro recorded a 2.2 percent weekly decline against the yen after German Chancellor Angela Merkel said on Jan. 13 that Greece’s mounting budget deficit risks hurting the euro, adding the currency faces a “very difficult” phase.

European Central Bank President Jean-Claude Trichet said yesterday individual members of the currency region can’t expect special treatment.

“The euro’s significantly underperforming relative to everything else,” said Jens Nordvig, a managing director for currency research at Nomura Holdings Inc. in New York. “The focus has really been on Europe and the fact that there remains a potential for a default, which seems to be the key catalyst.”