By Andrew Macaskill Nov. 26 (Bloomberg) -- The yen rose against the euro as investors pared holdings of higher-yielding assets funded in Japan before reports that may add to evidence of a deepening U.S. recession. The currency gained the most against the South African rand and Brazilian real. Reports today will probably show consumer spending, the biggest part of the U.S. economy, dropped in October by the most since the 2001 contraction and orders for durable goods, sales of new houses and consumer sentiment slid. The dollar snapped three days of declines against the euro. “The fundamental backdrop is still yen-supportive and we expect to see it continue to strengthen,” said Martin McMahon, a currency strategist in Zurich at Credit Suisse Group AG. “It’s clear that the economic problems are not over. Any bounce in confidence quickly fizzles out and risk aversion returns.” The yen strengthened to 123.71 per euro as of 7:08 a.m. in New York from 124.43 yesterday. The U.S. dollar bought 95.43 yen, from 95.22 yen. The currency may trade at 90 by March, McMahon said. The euro fell to $1.2970 from $1.3064. The pound declined to $1.5379 from $1.5472. The Japanese currency stayed higher even after China’s central bank slashed its key interest rate by the most in 11 years to 5.58 percent. Thailand’s baht slid as low as 35.35 per dollar, the weakest level since February 2007, as anti- government protesters stormed the main terminal at Bangkok’s international airport. The South African rand tumbled 1.3 percent to 9.5594 yen, while the Brazilian real slumped 1.3 percent to 40.5582 yen. Australia’s dollar slipped to 61.72 yen from 61.82 yen. Carry Trades The Japanese currency typically gains when investors reverse carry trades, where they borrow funds in a country with low interest rates and invest in those with higher lending rates. Japan’s benchmark interest rate of 0.3 percent compares with 12 percent in South Africa, 3 percent in the U.K. and 5.25 percent in Australia. Bank of America Corp. raised its forecast for the yen against the dollar on expectations the Bank of Japan will delay cutting interest rates and Japanese investors will refrain from funneling funds into overseas assets offering higher returns. The yen will trade at 97 per dollar at year-end and 100 at the end of March, compared with previous forecasts of 101 and 105, respectively, the bank said. The rate cut by China, the world’s fourth-largest economy, may weaken the yen by boosting confidence in Asia, said Stuart Bennett, a senior strategist in London at Calyon, the investment banking unit of French bank Credit Agricole SA. “It may encourage investors not to be too eager to rush into the yen,” Bennett said. “The cut reveals China is obviously very worried about the economy. But the currency- market view is that it’s doing something positive and that could weaken the yen.” Dollar Positive Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July through September, the most since the 2001 recession, according to revised figures from the Commerce Department in Washington yesterday. The global recession may spur investor demand for the relative safety of Treasuries, helping underpin the dollar, said UBS AG, the world’s second-largest foreign-exchange trader. The yield on the benchmark 10-year U.S. note fell nine basis points to 3.03 percent today, approaching the record 2.99 percent reached less than a week ago. “If the U.S. figures intensify recessionary fears, then we will see the dollar strengthening against the euro paradoxically,” said Antje Praefcke, a currency strategist in Frankfurt at Commerzbank AG, Germany’s second-biggest lender. “Fundamentals are not driving the market at the moment, so higher risk aversion is positive for the dollar.” Euro Gains The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, rose to 85.158 from 85.000 yesterday, when it fell 1.3 percent. The index climbed to 88.463 on Nov. 21, the highest level since April 2006. U.S. government securities returned 4.7 percent in November, heading for their biggest monthly gain since 1985, according to Merrill Lynch & Co.‘s U.S. Treasury Master index. The euro snapped a three-day winning stretch versus the dollar after a technical chart some traders use to predict price movements signaled its 3.8 percent gain in the past five days was excessive. “The euro has run out of steam, there is nothing else to propel it forward,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., a custodian of $23 trillion of financial assets. “The dollar is still well underpinned by risk aversion.” The euro’s 14-day stochastic oscillator versus the dollar was about 85. A level above 80 suggests a reversal may occur. To contact the reporter on this story: Andrew Macaskill in London at amacaskill@bloomberg.net

Source