By Ben Levisohn June 14 (Bloomberg) -- The yen declined for a third day against the euro and the dollar as signs the global economic recovery is weathering Europe’s fiscal crisis damped demand for the perceived refuge of Japan’s currency. The euro strengthened to the highest level in more than a week against the greenback after a report showed industrial production in the 16-nation region expanded at a faster pace than forecast. The Australian and New Zealand dollars rose versus the yen as higher stocks and crude oil spurred demand for higher-yielding assets. “The market is now trying the risk-on trade,” said Hidetoshi Yanagihara, a senior currency trader at Mizuho Corporate Bank Ltd. in New York. “It looks like everyone was expecting negative news out of Europe but there is no negative news so the market is unwinding short positions.” A short is a bet the price of an asset will decline. The yen fell 1.5 percent to 112.62 per euro at 10:33 a.m. in New York from 111 last week, after earlier dropping to 112.78, the weakest since June 4. Japan’s currency fell to 91.87 per dollar from 91.65. The euro climbed to $1.2259 from $1.2112, after reaching $1.2273, the strongest since June 3. The Standard & Poor’s 500 Index gained 0.7 percent. Crude oil for July delivery rose 2.6 percent on the New York Mercantile Exchange. Carry Trades The Australian dollar advanced 1.9 percent to 79.41 yen on speculation investors will boost carry trades, in which they borrow money in nations with low interest rates to invest in higher yielding assets. Japan’s benchmark rate of 0.1 percent, lower than Australia’s central bank rate rate of 4.5 percent, makes the yen a popular choice for funding such transactions. The euro extended last week’s advance against the dollar and the yen after a report showed European industrial production expanded 0.8 percent in April, more than economists forecast, after a 1.6 percent increase in March. The Bank of International Settlements said the euro’s 15 percent slump this year may fuel a resumption of economic growth by making local products cheaper than imported goods. The record budget deficits in countries including Greece had spurred speculation the 16-nation currency union may split. Implied volatility on one-month euro-dollar options fell to 13.3850 percent today, the lowest level since May 14, after trading as higher as 18.6150 percent last month, indicating investors see smaller price swings in the coming month. ‘Completely Unproblematic’ European Central Bank Governing Council member Ewald Nowotny said the euro’s volatility is “completely unproblematic” and doesn’t require any measures to counter it. “The volatility can’t be explained with economic reasons. It’s partly due to elements of speculation,” Nowotny said in Vienna today. “However, I don’t want to exaggerate it. We don’t welcome it but we don’t see a reason to act.” The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those betting on a gain was near a record on June 8, according to the Washington-based Commodity Futures Trading Commission. 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. “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. New Zealand Dollar 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. “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 8.8 percent against the greenback in the past 12 months, the second best performance among major currencies after the Canadian dollar. The kiwi today rose 1.6 percent to 64.25 yen and climbed 1.4 percent to 69.97 U.S. cents. Investors should buy the Australian dollar against New Zealand’s as the Aussie is “now oversold,” analysts at Credit Agricole CIB said in a report. “Buy Aussie-kiwi cash at current levels, with our quantitative model suggesting spot is below fair value,” Credit Agricole CIB’s Mitul Kotecha, Hong Kong-based head of global foreign-exchange strategy, and Simon Smollett, London-based technical analyst, wrote in an e-mailed note. The firm’s quantitative model is based on relative stock market performance in Australia and New Zealand, the Reuters/Jefferies CRB Index of 19 raw materials, and interest- rate differentials. The model shows “possible upside” for the Australian dollar versus its New Zealand counterpart, the analysts said in the research report dated June 11. To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net.

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