By Ron Harui June 14 (Bloomberg) -- The yen declined for a third day against the euro and the dollar on signs the global economic recovery is gaining momentum, damping demand for the safety of Japan’s currency. The yen weakened versus all 16 of its major counterparts as Asian stocks rallied after an index of U.S. consumer confidence increased. The euro strengthened to a one-week high against the dollar before a European report that economists said will show industrial production expanded for an 11th month. South Korea’s won advanced after policy makers said they will give banks time to meet a new ceiling on forward contracts, holding off from imposing controls on capital flows. “The outlook for economies worldwide to rebound is still intact,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The bias is for the yen to be sold and the euro may also be bought.” The yen declined to 112.11 per euro as of 7:03 a.m. in London from 111.00 in New York last week, after earlier dropping to 112.14, the weakest since June 4. Japan’s currency fell to 91.98 per dollar from 91.65. The euro climbed to $1.2186 from $1.2112, after reaching $1.2208, the strongest since June 4. The MSCI Asia Pacific Index of shares gained 1.2 percent after the MSCI World Index advanced 1.9 percent last week. The Thomson Reuters/University of Michigan preliminary index of U.S. consumer sentiment rose to 75.5, the highest since January 2008, from 73.6 in May, the June 11 report showed. Industrial Production The euro extended last week’s advance against the dollar and the yen before the European Union’s statistics office releases its industrial output report today. Production expanded 0.5 percent in April from March, when it increased 1.6 percent, according to a Bloomberg News survey of economists. The European Central Bank will buy government bonds until the financial markets calm down, the Nikkei newspaper yesterday reported Governing Council member Ewald Nowotny as saying. The euro’s level is still within a normal range, Nowotny said. “In the absence of any bad news about Europe, the euro correction could still have some room to go,” analysts led by Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co., wrote in a note to clients. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 111,945 on June 8, according to the Washington-based Commodity Futures Trading Commission, near the record of 113,890 set last month. Futures positions, when they reach an extreme, are sometimes viewed as a contrarian indicator because traders often seek to cut positions when momentum in a currency shifts. Korean Won South Korea’s currency gained for a second day versus the dollar after the government and central bank said in a joint statement yesterday lenders will be required to rein in use of foreign-exchange forwards, options and swaps to reduce volatility in capital flows and the won. “We finally know what these rules are and that has cleared the uncertainty,” said Jun Woo Ha, a Seoul-based currency dealer at Daegu Bank. The won rose 2 percent to 1,222.15 per dollar, after slumping 3.6 percent last week. The New Zealand dollar fell against the so-called Aussie after central bank Governor Alan Bollard said the strong currency has hindered efforts to reduce the country’s large investment-income deficit and overall external liabilities. ‘Has Not Helped’ “The trade balance has improved with strong export prices and less demand for imports,” Bollard said in a speech in Wellington. “But a large deficit on the investment income balance is showing no signs of enduring improvement and the strong New Zealand dollar has not helped.” New Zealand’s currency has risen 7.8 percent against the greenback in the past 12 months. The so-called kiwi fell 0.2 percent to NZ$1.2345 per Australian dollar. The biggest foreign-exchange fluctuations since the aftermath of the collapse of Lehman Brothers Holdings Inc. are signaling waning confidence in the economic recovery and prospects for a rebound in the euro. The euro’s 15 percent plunge against the dollar this year sparked a 6 percent loss for bets tied to foreign-exchange price volatility, according to Royal Bank of Scotland Group Plc indexes. That’s the worst performance among four currency strategies tracked by RBS and compares with a 22 percent gain last year, when the global economy rebounded. Europe’s sovereign-debt crisis, the failure of regional leaders to improve sentiment toward the euro and diverging growth rates around the world means elevated volatility for years, according to UBS AG. Less predictable foreign-exchange levels may endanger the recovery by driving up short-term rates, even as a weaker euro stimulates exports, the world’s second- largest currency trader said. “The sources of concern won’t go away anytime soon,” said Dale Thomas, head of currencies in London at Insight Investment Management Ltd., which oversees about $144 billion. “We’re defensive and still don’t like the euro.” Thomas said he owns the Swiss franc and the Japanese yen. To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net.

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