Yen Weakens as Stock Gains, Recovery Signs Boost Yield Demand

Feb. 2 (Bloomberg) -- The yen weakened against most of its major counterparts as optimism the global economic recovery is gaining momentum spurred demand for stocks and other higher- yielding assets.

The Japanese currency retreated from a nine-month high against the euro before reports forecast to show rising retail sales in Germany, Europe’s largest economy, and improving U.S. home sales. Australia’s currency advanced against the yen on expectations the nation’s central bank will today raise its benchmark interest rate to 4 percent.

“Stock advances are reviving risk appetite,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow in Tokyo. “Renewed risk appetite will hurt the yen.”

The yen traded at 126.30 per euro as of 11:09 a.m. in Tokyo from 126.24 in New York yesterday when it hit 124.43 yen, the strongest level since April 28. The euro traded at $1.3907 from $1.3931 in New York when it fell to $1.3853, the weakest level since July 8. The dollar fetched 90.79 yen from 90.61 yen.

Australia’s currency traded at 89.08 U.S. cents from 89.14 cents, and at 80.88 yen from 80.76 yen. All 20 economists in a Bloomberg News survey forecast the Reserve Bank of Australia will raise its benchmark rate by 0.25 percentage point today. Swaps traders are betting on a 71 percent chance of such a decision, according to a Credit Suisse Group AG index.

Benchmark interest rates are 3.75 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Home Sales

German retail sales, adjusted for inflation and seasonal swings, rose 0.9 percent in December from the previous month, according to a Bloomberg News survey of economists before the Federal Statistics Office in Wiesbaden releases the data today.

The number of contracts to buy previously owned U.S. homes rebounded 1 percent in December after plummeting 16 percent the previous month, a separate survey showed ahead of the National Association of Realtors’ report today.

The yen fell for a third day against the dollar after the Institute for Supply Management said U.S. manufacturing expanded at the fastest pace in five years, sparking a global equity rally. ISM’s factory gauge rose to 58.4 in January, compared with the median economist estimate of 55.5.

Shares Advance

“The headline was much better than expected,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “New orders continued to edge higher and prices paid were quite positive. Taken together, that means the yield curve is supported and there is upside in the dollar versus the yen.”

The Standard & Poor’s 500 Index rose 1.4 percent yesterday and the MSCI World Index snapped an eight-day losing streak, advancing 0.9 percent. The Nikkei 225 Stock Average rose 1.8 percent today while the MSCI Asia Pacific Index of regional shares gained 1.5 percent.

The yen also weakened against higher-yielding currencies amid speculation U.S. lawmakers will dilute proposed curbs on the size and risk-taking by banks.

Richard Shelby, the ranking Republican on the Senate Banking Committee, said yesterday through a spokesman that a proposal by the Obama administration to restrict proprietary trading by banks should be examined by lawmakers.

The president’s proposal may be either significantly modified or dropped, DealReporter said, citing unidentified lawmakers and staffers. DealReporter is part of the Financial Times Group.

“A drastic modification of this plan, if achieved, may halt the unwinding of positions in higher-yielding assets and revive some flow back into them,” said Takashi Kudo, general manager of market information service in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp.

Greece Concerns

The euro remained near the lowest level in almost seven months against the dollar amid concern Greece will struggle to reduce its public deficit.

The European Union will issue a review of Greece’s budget- cutting plans tomorrow. The nation’s deficit program is “very ambitious and this will need to be implemented under difficult circumstances,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia said in an interview yesterday in Brussels.

“European policy makers seem to be worried that Greece’s problems may spread,” said Yuji Saito, director of the foreign- exchange department at Calyon Bank in Tokyo. “This is putting a brake on any gains in the euro.”

The premium investors demand to hold Greek 10-year bonds instead of benchmark German bunds widened to almost 400 basis points last week, the highest since the year before the euro’s debut in 1999.