The yen fell the most in eight weeks against the dollar after a report showed demand for overseas assets among Japanese investors is growing and U.S. data added to evidence the global recession is moderating. Japan’s currency weakened versus the euro as the Ministry of Finance said the nation’s investors boosted purchases of foreign bonds last week to the most in a month. Ten-year U.S. Treasuries rose following a four-day rout on speculation the highest yields in six months will attract investors. Implied volatility of the dollar versus the yen, a measure of risk in foreign-exchange investments, fell for a fourth day. “Higher yields coupled with falling volatility may now begin to entice more outflows from Japan,” Derek Halpenny, European head of global currency research at Bank of Tokyo- Mitsubishi UFJ Ltd. in London, wrote in a report today. “We did not expect such a surge in U.S. 10-year yields, which is certainly dollar-yen supportive.” The yen declined as much as 1.9 percent to 97.24 against the dollar, the biggest intraday drop since March 31, before trading at 96.74 at 11:01 a.m. in New York, compared with 95.34 yesterday. The yen depreciated 2.3 percent to 134.78 versus the euro from 131.83. The dollar slid 0.8 percent to $1.3933 against the euro from $1.3825. Japanese investors bought 641.1 billion yen ($6.61 billion) more overseas bonds and notes than they sold in the week ended May 23, the biggest net purchases in a month, according to a report today from the nation’s Ministry of Finance. Treasury Yield The yield on the U.S. 10-year note fell 0.09 percentage point to 3.64 percent after rising yesterday to the highest level since November. The difference in yield between U.S. and Japanese 10-year notes increased yesterday to 2.27 percentage points, the widest in six months. Japan’s debt fell for a second day, pushing the yield up a basis point to 1.48 percent on concern the government will keep increasing its bond sales to fund stimulus for the economy. Implied volatility on three-month options for the dollar versus the yen fell 0.3 percentage point to 14.5 percent, the lowest level this week. Nomura Asset Management Co., a unit of Japan’s largest brokerage firm, reopened its higher-yielding bond fund to new investments yesterday. The net assets of the fund, which includes holdings such as Brazilian real-denominated debt, rose to 287.9 billion yen from 45.3 billion yen in January, according to Nomura’s Web site. Carry Trade Carry trade investing in 10 currencies including the real, Australian and New Zealand dollars and South African rand earned an annualized 28 percent return this year when funded with equal weightings of yen, dollars and Swiss francs, according to Bloomberg calculations. “The interest in playing the carry trade by Japanese investors has been revised, and that weighs on the yen,” said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. “Risk in dollar-yen is to the upside.” Japan’s currency may weaken to 100 per dollar by June 30, according to Klawitter. New Zealand’s dollar, the kiwi, posted its biggest advance in a month against the yen as Standard & Poor’s raised the outlook on the country’s AA+ sovereign debt rating to “stable” from “negative,” saying the national budget announced today showed the “government in sound position.” The kiwi advanced 1 percent to 62.08 U.S. cents and rose 3.2 percent to 60.45 yen. Australia’s dollar gained 0.7 percent to 78.14 U.S. cents and 2.4 percent to 75.71 yen. Yen Versus Euro The yen fell against the euro as the Nikkei 225 Stock Average reversed earlier losses to gain 0.1 percent, boosting demand for riskier assets. “Equity markets of emerging economies, including Asia, are holding a relatively firm undertone, which means risk appetite is still reasonably strong,” said Akira Takeuchi, a Tokyo-based currency dealer at Chuo Mitsui Trust & Banking Co., a unit of Japan’s seventh-largest banking group. “The yen will be sold against higher-yielding currencies.” Japanese retail sales fell for an eighth month in April, reducing the appeal of the nation’s currency. Sales slid 2.9 percent from a year earlier after dropping a revised 3.8 percent in March, the Trade Ministry said in Tokyo. Initial jobless claims in the U.S. dropped to 623,000 in the week ended May 23 from 636,000 in the previous week, the Labor Department reported. The median forecast of 41 economists surveyed by Bloomberg was for a decrease to 628,000. Durable Goods Orders for durable goods meant to last several years gained 1.9 percent in April after the previous month’s 2.1 percent decline. The median forecast of economists in a separate Bloomberg survey was for a 0.5 percent gain. The pound dropped from a six-month high against the dollar after Bank of England policy maker David Blanchflower told the London-based Times there may be “many false dawns” for the nation’s economy. Blanchflower, who is leaving the Bank of England’s rate- setting Monetary Policy Committee this week, told the Times it’s “pretty hard to see anything very strong for 2010.” Britain’s Chancellor of the Exchequer Alistair Darling predicted last month the U.K. economy will grow more than 1 percent next year, after contracting 3.5 percent this year. Sterling traded at $1.5948 after touching $1.6085 yesterday, the highest level since Nov. 5. The pound weakened 0.7 percent to 87.35 pence per euro. The euro rose against sterling on growing expectations for a rebound in the 16-nation economy. An index of executive and consumer sentiment in the region increased to 69.3 this month, the highest level since November, from 67.2 in April, the European Commission in Brussels said.

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