The yen and the dollar advanced on concern the global recession is deepening, spurring demand for the relative safety of the two currencies. Japan’s currency rose to the strongest in two weeks against the euro as Asian shares dropped, prompting investors to cut holdings of higher-yielding assets. The yen also gained versus the greenback before U.S. reports that may show industrial output fell for a fifth month and manufacturing contracted. Nine of the 10 most-traded Asian currencies outside Japan weakened after China said foreign direct investment fell a sixth month. “The markets are returning to reality from an exuberant state,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-biggest bank. “This is a correction which is leading to some buying of the yen. The dollar may be supported as the currency is likely to regain credibility.” he said. The yen rose to 98.50 against the dollar at 6:29 a.m. in London from 98.98 in New York yesterday. It earlier reached 98.15, the strongest level since March 31. Japan’s currency advanced to 130.63 per euro from 131.25, and strengthened to 70.80 per Australian dollar from 71.63. The U.S. dollar traded at $1.3263 per euro from $1.3259, and was at $1.4887 versus the British pound from $1.4895. The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona rose to 84.795 from 84.642 yesterday. The Nikkei 225 Stock Average fell 0.9 percent and the MSCI Asia-Pacific Index of regional shares declined 0.9 percent. Futures on the Standard & Poor’s 500 Index dropped 0.7 percent. ‘Negative’ Sentiment “We are negative on equity sentiment over the short term and accordingly expect euro-dollar to trade lower,” wrote Ashley Davies, a Singapore-based currency strategist at UBS AG, Switzerland’s largest bank, in a research note today. The S&P 500 has surged 26 percent since touching a 12-year low on March 6. The yen has fallen 11 percent against the dollar since reaching the weakest in 13 years on Jan. 21. Foreign direct investment into China dropped 9.5 percent to $8.4 billion from a year earlier, the commerce ministry said in Beijing today. That compares with a 15.8 percent decline in February. For the first quarter, spending fell 20.6 percent to $21.8 billion. Volatility Rises Volatility implied by one-month Australian dollar options against the yen rose to 29.7 percent from 29.2 percent yesterday, indicating a greater risk of exchange-rate fluctuations that can erode profit on so-called carry trades. In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates. The risk is market moves can erase those profits. The benchmark interest rate is 0.1 percent in Japan, compared with 3 percent in Australia and in New Zealand. The yen rose the most in four weeks against the dollar yesterday after the Commerce Department said U.S. retail sales unexpectedly fell 1.1 percent in March. The median forecast of economists surveyed by Bloomberg was for a 0.3 percent increase. “Sooner rather than later pessimism will return to the market,” said Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital, the world’s third-largest foreign-exchange trader. “The yen will be the beneficiary.” U.S. industrial output declined 0.9 percent in March, according to a Bloomberg News survey before the Federal Reserve report today. The Fed Bank of New York’s Empire State index of manufacturing, also due today, was minus 35 in April, a 12th month of contraction, a separate Bloomberg survey showed. Wholesale Prices The euro may fall for a second day versus the dollar on concern a German report will show wholesale prices dropped for a fifth month, supporting the case for the European Central Bank to cut interest rates. Prices fell 7.1 percent in March from a year earlier, after a 5.7 percent drop the previous month, according to a Bloomberg survey before Germany’s Federal Statistics Office releases the report today. Europe’s single currency weakened yesterday as Standard & Poor’s said leveraged buyouts may help push corporate defaults in Europe to a record 14.7 percent this year. “The S&P report renews concern over possible defaults at financial institutions in Europe,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “It would be negative for the euro.” The 16-nation currency may weaken to $1.3180 and 130 yen today, he said. Between 90 and 112 speculative-grade companies in western Europe rated by S&P may default this year, the New York-based company said, increasing an earlier estimate of as much as 11.1 percent. ECB Rates The ECB cut its benchmark interest rate on April 2 by less than economists predicted, reducing it by a quarter-percentage point to 1.25 percent. Policy makers next meet May 7. The dollar may weaken toward the post-World War II low of 79.75 yen after climbing to about 103 yen in the coming weeks, according to Mizuho Financial Group Inc. The level of 103 yen is the top of a so-called ichimoku cloud where sell orders may be triggered, causing the dollar to approach 79.75 yen, the postwar low set in April 1995, said Hiroyuki Tanaka, chief technical analyst at Mizuho Corporate Bank, a unit of Japan’s third-largest lender. “The real game starts when dollar-yen hits the cloud,” Tokyo-based Tanaka said. The dollar’s path resembles the currency’s movements from March to August 2008 after the near- collapse of Bear Stearns Cos., he said. The dollar tumbled to a 13-year low of 87.13 yen on Jan. 21 after the previous occasion the greenback failed to break through a cloud pattern. The dollar is entering the cloud for a second time after reaching a “double-bottom” of about 87.10 in December and January, according to Tanaka.

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