By Anchalee Worrachate July 6 (Bloomberg) -- The yen and dollar dropped against the euro before a report on U.S. service industries as a rally in stocks damped demand for a refuge. Australia’s dollar rose against all of its 16 most-traded counterparts as the nation’s central bank said business investment is poised to expand and a report showed the trade surplus swelled in May, paced by demand in Asia for coal and gold. The euro advanced versus the dollar as the Stoxx Europe 600 Index climbed for the first time in more than a week. “The yen came under pressure as stocks and some commodity currencies rebounded,” said Ian Stannard, a currency strategist at BNP Paribas SA in London. “The Aussie dollar led the gain. There’s still a lot of optimism about the country’s economic outlook.” Japan’s currency weakened 0.5 percent to 110.56 per euro at 7:17 a.m. in New York, from 110.05 yesterday. It slipped 0.2 percent to 87.93 per dollar, from 87.77. The euro advanced 0.3 percent to $1.2574, from $1.2538. New Zealand’s dollar advanced 0.7 percent to 60.88 yen and South Africa’s rand appreciated 0.7 percent to 7.70 versus the dollar as the rally in equities encouraged investors to purchase higher-yielding assets. Equity Gains The Stoxx Europe 600 Index increased 2.5 percent, while S&P 500 Index futures expiring in September climbed 1.2 percent. Australia’s currency appreciated 1.1 percent to 84.81 U.S. cents, after dropping to 83.16 cents on July 1, the lowest level since June 10. The Aussie appreciated 1.2 percent to 74.57 yen, from 73.67. Reserve Bank of Australia policy makers led by Governor Glenn Stevens held the overnight cash rate target at 4.5 percent, saying output growth is likely to be about trend. “The market had built in a bit more bearishness than the RBA delivered,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. “They don’t seem as concerned about the global economy as the market, and that should support the Aussie dollar.” Yen This Year The yen has gained 13 percent against its global peers this year, according to Bloomberg Correlation-Weighted Currency Indices, on concern the global economic recovery is slowing. Rich nations will reduce their primary budget deficits, excluding interest payments, by 1.6 percentage points next year, the most since the Organization for Economic Cooperation and Development began keeping records in 1970, according to JPMorgan Chase & Co. economists. The budget squeeze will lop 0.9 percentage point off growth in 2011. Recoveries worldwide are “very slow” and any tightening of monetary policies by central banks would cause a “big problem,” Kenneth Rogoff, a Harvard University professor and former chief economist of the International Monetary Fund, said in a Bloomberg Television interview today. U.S. Services Service industries in the U.S. expanded in June at a slower pace, indicating the economy started to cool entering the second half, economists said before a report today. The most accurate foreign-exchange forecaster says the euro will resume its decline and may approach parity with the dollar as the European Central Bank buys more government bonds to support the region’s economy. Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, said the euro will depreciate to $1.13 in the third quarter, $1.08 by year-end and may near $1 in 2011 before recovering. Osborne, whose predictions were within 4.1 percent of the mark on average, according to data compiled by Bloomberg, was echoed by the nine following most-accurate forecasters anticipating a lower euro in the next two quarters. The euro weakened 15 percent against the dollar in the first half on speculation record budget deficits from Ireland to Portugal to Greece will force governments to cut spending and reduce economic growth. Bond yields among the euro-area’s so- called peripheral nations surged relative to German bunds even as European Union leaders crafted an almost $1 trillion aid package to avoid sovereign defaults. --With assistance from Matthew Brown in London. Editors: Dennis Fitzgerald, David Clarke To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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