The yen and the dollar rose after Yonhap News reported that North Korea carried out a missile experiment a day after conducting a nuclear test that provoked international condemnation. The yen strengthened versus all 16 of its most-traded peers after Yonhap said Kim Jong Il’s government test-fired two missiles, stoking demand for the currency as a refuge. The euro fell for the first time in seven days against the dollar after Britain’s Daily Telegraph cited a German banking regulator as saying debt at the nation’s biggest lenders may increase. The New Zealand dollar ended six days of gains after a government report showed exports declined in April. “The market is still digesting the news from North Korea,” said Jeremy Stretch, a senior currency strategist at Rabobank International in London. “The dollar is holding up and the yen is also having reasonable gains. The defining factor is broad risk metrics.” The yen weakened to 95.01 per dollar as of 10:17 a.m. in London, from 94.83 yesterday in New York. It appreciated to 131.82 per euro, from 132.92. The euro declined to $1.3869, from $1.4017. South Korea’s won weakened against 12 of the 16 major currencies, losing 1.4 percent versus the yen and 1.1 percent against the dollar, according to Seoul Money Brokerage Services Ltd. The New Zealand dollar dropped 1.3 percent versus the dollar. The won began falling as the nation’s benchmark stock index slumped for a fourth day after Yonhap reported North Korea was preparing further nuclear tests. ‘Knee-Jerk Reaction’ “This kind of news may trigger a knee-jerk reaction among those short-term players who wanted to buy Asian currencies,” said Taisuke Tanaka, managing director and foreign-exchange strategist in Tokyo at Nomura Securities Co., a unit of Japan’s largest securities broker. “But given the fact that most Asian countries enjoy huge current-account surpluses, this type of event won’t change the overall international capital flow.” The euro slid as the Telegraph quoted Jochen Sanio, president of Germany’s regulator BaFin, as saying the debt levels of German banks will blow up “like a grenade” unless they participate in the government’s bad bank plan. Moody’s Investors Service placed the financial strength ratings of Bulgaria’s DSK Bank AD and First Investment Bank Ltd. on review for possible downgrades, citing “the likely deterioration of the Bulgarian operating environment.” German Bank Debt “The report over the German debt situation isn’t helping sentiment toward the euro,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a part of the world’s largest interbank broker. The comments sound “fairly dire.” German banks have 200 billion euros ($280 billion) of bad debts Sanio said last week, according to the Telegraph. Write- offs may reach 816 billion euros, the newspaper reported, citing an internal memo from the regulator’s office. In an interview with Bloomberg News last week, Sanio said Germany is “more than able” to cope with the 200 billion euros of toxic assets that its banks still hold. The dollar’s gains may be tempered on speculation bond sales this week will renew concerns that a record supply of Treasuries will jeopardize the U.S.’s AAA credit rating. Ten-year Treasuries fell the most since June 2008 last week as the U.S. prepared to resume debt auctions after a two-week pause. The Treasury plans to sell $40 billion in two-year notes today, $35 billion in five-year notes tomorrow and $26 billion in seven-year notes on May 28. It will also sell $61 billion in three-month and six-month bills in a weekly auction today. Rising Debt Sales The U.S. will increase debt sales to $3.25 trillion in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., as President Barack Obama borrows record amounts to try to snap the recession in at least 50 years. Standard & Poor’s lowered its outlook on the U.K.’s AAA credit rating May 21 to “negative” from “stable,” raising concern that the same may happen to the world’s biggest economy. “Given growing concerns about U.S. creditworthiness, capital outflows from the dollar-denominated assets may gain further momentum,” said Kengo Suzuki, manager of the foreign bond trading department in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group. Rising debt levels may jeopardize the AAA credit rating of the U.S. in the next three years, New York University economist Nouriel Roubini told Il Sole 24 Ore in an interview. “The situation may become risky in two, thee years time,” Roubini told Sole. “The evolution of the crisis requires paying attention to this matter too.” Australian Dollar The Australian dollar fell for a second day, losing 1 percent and paring a 29 percent gain since dropping to a five- year low of 60.09 cents in October. Analysts are raising forecasts for the Australian dollar faster than any other major currency on optimism for a global economic recovery. The median year-end Aussie forecast in monthly Bloomberg surveys rose 14 percent this year, the biggest increase among the 16 most-traded currencies against the U.S. dollar, and is now 3 cents shy of the current price, half the gap in January. Strategists at BNP Paribas SA, Wells Fargo & Co. and 21 other companies raised estimates in May on speculation China’s demand for Australian exports, from iron ore to wool, will rebound. “The bears are throwing in the towel, and the Aussie is undervalued,” said Paresh Upadhyaya, who helps manage $21 billion in currency as a Putnam Investments senior vice president in Boston.

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