BLBG: Yen, Dollar Advance as Stock Declines Boost Demand for Safety
The yen and the dollar strengthened against higher-yielding currencies as Asian stocks extended a worldwide slump in equities, spurring demand for safer assets.
The yen gained versus 15 of the 16 most-traded currencies after European Central Bank council member Axel Weber warned against “exaggerating” recent signals the economy is stabilizing. Japan’s currency also rose to an eight-week high versus the dollar on concern General Motors Corp., the biggest U.S. automaker, is moving closer to bankruptcy. India’s rupee climbed to a four-month high on optimism Prime Minister Manmohan Singh’s election victory will help his party implement reforms.
“We are seeing risk aversion across the board,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader. “The market is becoming more vulnerable to negative news and the sharp fall in equities is causing a sell off” in higher-yielding currencies.
The yen advanced to 127.78 per euro as of 6:24 a.m. in London, from 128.43 in New York last week, when it surged 4.5 percent. It earlier gained to 126.98, the strongest level since April 29. The dollar appreciated to $1.3461 per euro from $1.3495. The yen advanced to 95.03 per dollar from 95.21 last week, after touching 94.55, the strongest since March 20.
The rupee jumped to 48.31 a dollar from 49.41 last week, after touching 48.235, the highest since Jan. 5. The British pound fell for a second day, weakening to $1.5163 from $1.5180.
Stocks, Volatility
The Nikkei 225 Stock Average slid 2 percent and the MSCI Asia Pacific Index of regional shares declined 0.5 percent. The MSCI World Index dropped 0.6 percent, after falling last week for the first time March. U.S. Treasuries gained.
“We’re in for another week dominated by equities and given the poor close of the U.S. market, there is caution about a sell-off in risk,” said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney.
The VIX Index, a measure of market volatility known as Wall Street’s “fear gauge,” rose 5.6 percent on May 15 to 33.12, indicating traders were becoming less optimistic about stock- market gains.
Some investors sought shelter in the yen as Japan’s trade surplus makes the currency more attractive in times of turmoil by showing the country doesn’t rely on overseas lenders. Others took refuge in the dollar as the world’s reserve currency.
‘Safe Haven’
“The VIX measure of risk aversion increased and demand for the ‘safe haven’ yen and dollar has improved,” John Kyriakopoulos, Sydney-based head of currency strategy at National Australia Bank Ltd., the country’s biggest lender by assets, wrote in a note to clients.
The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, rose to 83.091 from 83.024.
Moody’s Investors Service said today it will hold a briefing on Japanese government bonds at 3 p.m. in Tokyo.
ECB council member Weber said the central bank has done enough to help the economy and shouldn’t consider further measures unless things get a lot worse, the Financial Times Deutschland reported, citing an interview.
Still, Weber was also quoted saying, “the crisis has yet to reach the people via job losses. Calling an end to the crisis too early is very risky. People will be disappointed and that could have an enormous impact on confidence.”
Investors raised bets the ECB will cut its 1 percent benchmark at its next meeting on June 4. The implied yield on the three-month Euribor futures contract for June delivery fell to 1.125 percent from 1.17 percent a week ago, according to data compiled by Bloomberg. The central bank on May 7 announced a plan to buy 60 billion euros ($80.6 billion) of bonds to help keep borrowing costs down.
‘Probable’ Bankruptcy
The yen gained for a second day versus the dollar on concern General Motors will fail to meet its June 1 deadline to cut costs and debt to avoid bankruptcy. Bankruptcy is now “probable,” Chief Executive Officer Fritz Henderson said on Bloomberg Television on May 14.
GM’s tasks include cutting operating expenses and negotiating with bondholders and unions to reduce debt and union obligations by $44 billion.
“The yen is strengthening on the back of the risk associated with the U.S. economy and the U.S. government plan to help out the auto industry,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “There are risks associated with Europe and the U.S., which leads to the appreciation of the yen.”
The yen is likely to appreciate to 125 per euro this week, Kato said.
Net Longs
The difference in the number of wagers by hedge funds and other large speculators on a gain in the yen compared with those on a drop -- so-called net longs -- was 2,388 on May 12, compared with net shorts of 6,518 a week earlier, figures from the Commodity Futures Trading Commission showed. A long position is a bet an asset will rise.
Declines in the pound may be limited as investors from Millennium Asset Management to Mellon Capital Management Corp. are betting its losses are coming to an end. The pound’s 20 percent drop in the past year made Britain the first choice when Schroders Plc started buying real estate in Europe last month.
“Weaker sterling makes U.K. property more attractive,” said Neil Turner, the Wiesbaden, Germany-based executive in charge of the money manager’s new 300 million-euro property fund. “The U.K. property market is a screaming buy compared to rivals in continental Europe.”
The rupee gained for a second day after Singh’s Congress party and its allies won 260 of the 541 seats in the lower house of India’s parliament, exceeding the most optimistic prediction in exit polls released after the election ended May 13.
“The election result is extremely positive and very, very bullish,” said Madhusudan Kela, head of equities at Mumbai- based Reliance Capital Asset Management, the nation’s largest money manager overseeing $18 billion of assets. “This will provide a government which is stable and has powers to take decisions.”
