The yen rose against the dollar and the euro after a Bank of England report dented optimism about the pace of global economic recovery, fueling demand for the Japanese currency as a refuge from the financial turmoil. The yen also strengthened versus the pound, the New Zealand dollar and the Norwegian krone as a report showed industrial production in the 16-nation euro region fell the most on record in March and the U.K. central bank predicted a “protracted recovery.” The JPMorgan Chase & Co. index of investor expectations for currency swings, known as implied volatility, was at 14.42 percent, from 13.38 percent last week. “The Bank of England’s inflation report was more bearish than the market anticipated and that damped sentiment,” said Lee Hardman, a currency economist in London at Bank of Tokyo- Mitsubishi UFJ Ltd. “The industrial output data was also a lot weaker than expected. Despite some improvement in confidence, the market seems to retain its bearish bias.” The yen strengthened to 96 per dollar as of 7:26 a.m. in New York, from 96.45 yesterday. It appreciated to 130.97 per euro, from 131.63. The dollar was little changed against the euro at $1.3644. Britain’s gross domestic product will contract on an annual basis for the rest of this year, before growth resumes in 2010, the central bank’s forecasts published today in London showed. Inflation will slow to as low as 0.4 percent this year. Economic Reports Gains by the yen may be limited after a report showed China’s retail sales rose 14.8 percent in April from a year earlier, compared with a 14.7 percent increase in March. The median estimate of economists in a Bloomberg survey was for a 14.5 percent gain. Industrial output in the nation increased 7.3 percent after climbing 8.3 percent in March. “The risks are weighted toward a relatively slow and protracted recovery,” Bank of England Governor Mervyn King said in London today. There are “pretty solid reasons” to question whether a recovery can be sustained and “inflation is more likely to be below the target than above.” The pound weakened to 90.06 pence per euro, from 89.37 pence. It dropped to $1.5151, from $1.5271. Production in the euro region plunged 20.2 percent from a year earlier, the biggest drop since the data series started in 1986, according to the European Union’s statistics office in Luxembourg. Output slid as the worst recession in more than half a century forced manufacturers to cut output. Europe’s Dow Jones Stoxx 600 Index of equities slid 1.4 percent, the third-consecutive daily decline. Futures on the Standard & Poor’s 500 Index dropped 0.8 percent, boosting demand for safest assets. Global Confidence King’s comments were made even as confidence in the global economy rose to the highest level in 19 months as central bankers pointed to signs of a recovery and stress tests on U.S. banks reassured investors, a Bloomberg survey of users showed. The Bloomberg Professional Global Confidence Index climbed to 38.72 in May from 21.2 in April, the biggest increase since the survey began in November 2007. Because the number is below 50, it means pessimists still outnumber optimists. Individual investors in Japan increased bets to the most in six months that the yen will weaken as the economy stabilizes, jumping back into a trade that was all but wiped out last year. Businessmen, housewives and pensioners held 153,326 margin contracts at the end of last month that will make money if the yen declines against currencies ranging from the euro to the Australian and New Zealand dollars, according to the Tokyo Financial Exchange. All told, they may have as much as $125 billion in yen so-called short positions, RBC Capital Markets strategists said. “Investors believe the worst of the global recession is over and higher-yielding currencies are bottoming out,” said Yoshisada Ishide, who oversees $1.8 billion as a Tokyo-based fund manager at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest investment bank.

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