The yen weakened beyond 96 against the dollar for the first time since November as Japan’s deteriorating economy eroded demand for the currency as a refuge from the global financial crisis. Japan’s currency also dropped against the euro and the Swiss franc as Prime Minister Taro Aso’s approval rating slumped and economists forecast a report will show the trade deficit increased to the widest in 23 years. The dollar declined versus the euro as U.S. home prices fell in December. “There’s continued weak economic data coming out of Japan and a decoupling of the yen-strength-on-equity-weakness trade,” said Andrew Busch, a global currency strategist in Chicago at BMO Capital Markets, a unit of Canada’s fourth-largest bank. “The ruling government there has got subterranean approval ratings.” Japan’s currency declined 1.4 percent to 95.94 per dollar at 9:02 a.m. in New York, from 94.61 yesterday. It touched 96.07, the weakest level since Nov. 25. The yen depreciated 1.6 percent to 122.07 per euro from 120.10 after reaching 122.79, the weakest since Jan. 9. The dollar slid 0.3 percent to $1.2726 per euro from $1.2694. The yen was the best performer in 2008 among the 176 currencies tracked by Bloomberg, climbing 23 percent versus the dollar and 29 percent against the euro. The gains undermined overseas sales for exporters including Toyota Motor Corp., Honda Motor Co. and Sony Corp. The yen will trade at 96 against the dollar at the end of 2009, according to the median forecast of 47 economists surveyed by Bloomberg. Yen’s Decline Japan’s currency fell 6.6 percent against the dollar since trading at a 13-year high on Jan. 21 even as the Standard & Poor’s 500 Index lost almost 12 percent. The yen declined against the euro today for a fifth straight day, the longest stretch since September. “The yen appears to be losing some of its safe-haven status,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Japan’s economic and political situation is poor.” The MSCI World Index dropped 0.7 percent today, its 11th straight decline, as every major stock market in Europe fell. Futures on the S&P 500 Index gained 0.6 percent after the index decreased yesterday to the lowest level since April 1997. Japan’s trade deficit widened to 1.2 trillion yen in January, the Finance Ministry will say tomorrow, according to a Bloomberg News survey. Core consumer prices probably fell for the first time in more than a year in January, economists in a separate survey predict a government report will show Feb. 27. Approval Rating Prime Minister’s Aso’s approval rating fell 6.8 percentage points from last month to 11.4 percent, while his disapproval rating rose 8.8 points to 80.2 percent, showed the Sankei survey, conducted with Fuji News Network. The governing Liberal Democratic Party has the support of 21.9 percent, compared with 25.9 percent for the opposition Democratic Party of Japan. The correlation between the dollar-yen and the Nikkei-225 Stock Average was minus 0.89 since Feb. 16, when a report showed Japan’s economy shrank at an annual 12.7 percent pace in the last quarter, the most since the 1974 oil shock. The relationship was positive 0.86 in the 12 months to Feb. 16. A reading of 1 would mean the two moved in lockstep. “The correlation has broken down because the drivers are now changing,” said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA. “Dollar-yen in particular will continue to move quite sharply higher.” Stocks and Yen The relationship between stocks and the yen has been in place since the beginning of 2005, when the so-called carry trade was established, said Derek Halpenny, European head of global currency research at Bank of Tokyo Mitsubishi Ltd in London, which said at the end of January that the yen would start to weaken. “From recent price action, I think it’s a fairly good bet that the carry has been unwound, and that will certainly weaken the risk-yen correlation,” Halpenny said. In the carry trade, investors buy higher-yielding currencies with lower-yielding ones, such as the yen. The yen gained 30 percent against the dollar from June 22, 2007, to Dec. 17, 2008, as the trade all but evaporated. Traders are starting to use credit-default swaps, the speculative contracts blamed for fueling Wall Street’s meltdown last year, to measure currency strength as countries increase debt sales to kickstart their economies. Interest rates are becoming less useful for predicting foreign exchange as central banks cut borrowing costs to near zero, narrowing differences between government debt yields. Japanese Bond Risk The cost of protecting Japanese bonds for five years rose to a record 122 basis points Feb. 17, compared with an average of 23 basis points last year. The contracts rose two basis points to 98 basis points today, according to data compiled by Bloomberg. Ukraine’s hryvnia weakened below its lowest close on record of 9.1 per dollar after Moody’s Investors Service said it may cut the nation’s credit rating because political disputes are hurting policy makers’ attempts to address the economic crisis. The ratings company placed Ukraine’s government local and foreign-currency bond ranking of B1, four levels below investment grade, on review for downgrade, Washington-based Moody’s said today. The dollar declined against the euro on concern the U.S. economic slump is deepening. The S&P/Case-Schiller index of house prices in 20 U.S. cities declined 18.55 percent in December from a year earlier.

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