The yen and the dollar posted annual gains versus the euro as the first simultaneous recessions in the U.S., Europe and Japan since World War II encouraged investors to take refuge in the currencies. The dollar fell the most against the yen in more than two decades in 2008 on speculation the Federal Reserve’s zero interest rate will undermine demand for the greenback. The euro recorded its biggest rally against the pound since the 15-nation currency’s 1999 debut, trading within 5 pence of parity on speculation the recession in the U.K. will deepen. “It was a year of deleveraging, a year of dollar demand caused by uncertainty, and a reversion to yen strength,” said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York. The dollar dropped 19 percent to 90.86 yen yesterday from 111.75 at the end of 2007, the biggest decline since 1987. The U.S. currency gained 4.5 percent to $1.3966 per euro from $1.4057, the first increase in three years. It touched $1.6038 on July 15, the weakest level ever. Europe’s currency decreased 22 percent to 126.82 yen from 163.04 The rand was the worst performer against the dollar in 2008 among major currencies tracked by Bloomberg, weakening 27 percent to 9.4375 as commodity prices fell and investors pulled money from higher-yielding assets. Euro Versus Pound The euro gained 30 percent to 95.80 versus sterling in 2008, the most since its inception, and reached a record high of 98.03 pence on Dec. 30. The Bank of England reduced its benchmark interest rate by 3.5 percentage points to 2 percent to limit the fallout from the global financial crisis. The yen gained versus all of the major currencies in 2008, strengthening 52 percent to 64.15 against the Australian dollar and 61 percent to 53.18 versus New Zealand’s currency as $1 trillion in credit-market losses encouraged investors to unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s target lending rate of 0.1 percent compares with 4.25 percent in Australia and 5 percent in New Zealand. The yen’s gains versus the dollar undermined overseas sales for exporters including Toyota Motor Corp., Honda Motor Co. and Sony Corp. Japan’s overseas sales declined a record 27 percent in November from a year earlier, Japan’s Finance Ministry reported last month. Concern in Japan “Japanese authorities are very concerned about their industrial sector, and moving through 90 on a sustained basis will be very tough for them to tolerate,” said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York, in an interview on Bloomberg Television. “It will be difficult to get actual intervention unless we get another pretty hard shot down below 90.” Central banks intervene by buying or selling currencies when they seek to influence exchange rates. The dollar gained for the first time in three years against an index of the currencies of six major U.S. trading partners as investors sought protection in Treasuries. 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, increased 6 percent to 81.308 in 2008. It reached 88.463 on Nov. 21, the highest since April 2006. U.S. Treasuries returned 14.9 percent, the most since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master index. The yield on the 10-year note fell to 2.0352 percent on Dec. 18, the lowest on record for data going back to 1953. Rout in Stocks The Standard & Poor’s 500 Index plunged 38 percent in 2008, the biggest drop since the Great Depression. The MSCI Europe Index fell 45 percent, while the MSCI Asia Pacific Index, which includes Japan, slid 43 percent. The Dollar Index fell 6 percent in December after the Fed cut its benchmark interest rate to a range of zero to 0.25 percent for the first time and shifted its focus to debt purchases to revive the economy. The number of Americans collecting unemployment benefits jumped in the week that ended Dec. 20 to the highest level since 1982, the Labor Department reported yesterday. The European Central Bank cut its main refinancing rate to 2.5 percent last month, 1.5 percentage points lower than at the start of 2008, with some policy makers indicating they may be reluctant to lower borrowing costs again in January. ECB Outlook “The risk of deflation, along with continued deterioration in economic fundamentals, will prompt the ECB to re-evaluate its stance of possibly keeping rates on hold in January and prompt them to take action and cut rates,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. “Interest-rate differentials will swing back in favor of the dollar.” The dollar may strengthen to $1.25 per euro and trade at 90 yen at the end of the first quarter, according to the median estimates of analysts in a Bloomberg News survey. The Australian and New Zealand dollars posted their biggest annual declines against the dollar since they started trading freely in 1983 and 1985. The currencies in 2008 reached their highest against the U.S. dollar in more than 20 years before sliding in tandem with commodities, which account for more than half the countries’ exports. The Aussie dropped 19 percent in 2008 to 71.05 U.S. cents, while New Zealand’s currency fell 24 percent to 58.71. A 54 percent plunge in crude oil futures in 2008 contributed to the steepest annual drop in raw-materials costs in more than half a century. Canada’s dollar also posted a record decline against the U.S. currency in 2008, falling 20 percent to C$1.2185 from near parity with the greenback. Commodities account for about half of Canada’s export revenue.

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