BLBG: Yen Drops Versus Euro on Deepening Political Turmoil, Recession
The yen fell against the euro, paring a weekly gain, on concern Japan’s political turmoil will make it harder for the government to counter the deepening recession.
The yen headed for a sixth week of declines versus the dollar after local media reported Japanese prosecutors suspect a group headed by Trade Minister Toshihiro Nikai took illegal political donations. The dollar was near a three-month high against the euro on speculation a slide in stocks will boost demand for the safety of the U.S. currency. The British pound rose for a fourth day versus the euro as the European Central Bank may lower interest rates faster than U.K. policy makers.
“Political uncertainty seems to be mounting and the Japanese economy isn’t showing any signs at all of improving,” said Ryohei Muramatsu, Tokyo-based manager of Group Treasury Asia at Commerzbank AG, Germany’s second-largest lender. “The yen is likely to be sold” to 99 against the dollar and 124.10 per euro today, he said.
The yen declined to 123.53 per euro as of 2:07 p.m. in Tokyo from 123.00 late in New York yesterday, trimming its gain to 0.1 percent from Feb. 27. Japan’s currency was at 98.16 against the dollar from 98.07 yesterday, heading for a 0.6 percent weekly drop.
Europe’s single currency traded at $1.2581 from $1.2540 yesterday. It was at 88.72 British pence from 88.82 pence. The pound rose to $1.4182 from $1.4118 and the Swiss franc climbed to 1.1633 from 1.1713.
‘Much Worse’
The yen fell against 14 of the 16 major currencies today on concern Japan’s political turmoil will undermine the government as it grapples with a slump that may be the country’s deepest recession since 1945. Finance Minister Kaoru Yosano said today the nation’s economic data has been “much worse” than expected and the government will need to revise its gross domestic product forecast soon.
Japan will record a current account deficit for the first time in 13 years in January, according to a Bloomberg survey of economists before the March 9 report. The world’s second-biggest economy shrank an annualized 12.7 percent last quarter, the government said Feb. 16, the biggest contraction since the 1974 oil crisis.
The yen will fall to 102 against the dollar as risk sentiment improves and a weakening domestic economy prompts investors to buy assets outside Japan, Barclays Capital said.
The currency has lost 8.8 percent since strengthening to 87.12 per dollar on Jan. 21, the highest since 1995, as investors sold higher-yielding assets to repay low-cost borrowings in Japan. The yen will weaken 4 percent against the greenback over the next three months, Barclays said, revising last month’s forecast for the currency to strengthen to 86.
Negative Sentiment
“The deteriorating state of both the economy and the political situation appears likely to add momentum to negative sentiment about Japanese assets,” Toru Umemoto and Yuki Sakasai, Tokyo-based strategists at Barclays, wrote in a research note yesterday. “The Japanese current account is declining, outward foreign direct investment increasing and Japanese investors continue to purchase foreign securities.”
Trade minister Nikai told reporters in Tokyo today he had no knowledge of an investigation into one of his political groups over suspected campaign donations and had done nothing wrong. Prosecutors suspect a group he headed received donations from Nishimatsu Construction Co., the Sankei newspaper reported, without saying where it got the information.
The Dollar Index, which the ICE uses to track the greenback against the currencies of six major U.S. trading partners, headed for a fourth weekly advance after U.S. and Asian stocks slumped, encouraging investors to seek shelter from the financial turmoil.
‘Deteriorating’
“The deteriorating global backdrop is reviving risk aversion,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. “This may encourage demand for the dollar.”
The Dollar Index gained 1 percent this week to 88.855 after JPMorgan Chase & Co., the second-largest U.S. bank, had its rating outlook cut to negative from stable. The Standard & Poor’s 500 Index dropped to the lowest since 1996 yesterday and the MCSI Asia Pacific Index fell 1.6 percent today, set for a fourth week of declines.
The greenback may strengthen before a U.S. Labor Department report today that economists say will show employers in the world’s largest economy cut jobs for a 14th month, prompting investors to reduce holdings of riskier assets.
‘Ongoing Uncertainty’
“With the ongoing uncertainty, particularly surrounding financial institutions, and disappointing data, investors should continue to seek havens,” Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut, wrote in a research note yesterday. “Dollar assets remain an attractive option to risk- averse investors.”
U.S. employers cut 650,000 jobs in February, and the unemployment rate rose to 7.9 percent, according to the median forecasts in Bloomberg News surveys. The Labor Department’s payroll report is due at 8:30 a.m. in Washington.
The British pound gained against the euro on speculation ECB Executive Board member Lorenzo Bini Smaghi will reiterate that the bank will cut interest rates further. U.K. policy makers may have finished lowering borrowing costs.
ECB President Jean-Claude Trichet yesterday signaled the central bank will reduce the main refinancing rate again after lowering it to a record 1.5 percent.
“Looking forward, the market will likely expect further cuts by the ECB, but likely not by the BOE,” Sebastien Barbe, a strategist in Hong Kong at Calyon, the investment banking unit of Credit Agricole SA, wrote in a research report today. “This may support” the pound versus the euro, he said.
The Bank of England yesterday cut its benchmark rate half a percentage point to a record 0.5 percent and said it will pump cash into the economy by buying as much as 150 billion pounds ($212 billion) of government and corporate bonds.
