BLBG: Yen Advances to Six-Week High on Swine Flu, U.S. Bank Concern
The yen advanced to a six-week high against the euro after the World Health Organization said the swine flu outbreak is no longer containable, triggering demand for the Japanese currency as a refuge.
The yen also gained for a fifth day versus the dollar after the Wall Street Journal said Bank of America Corp. and Citigroup Inc. were told by regulators they need more capital. The South Korean won and Malaysian ringgit led declines in Asian currencies on concern swine flu will curb tourism.
“The threat of a pandemic has prompted an across-the-board foreign-exchange sell off, with market participants running for cover and diving back into the dollar and the yen,” said Stuart Bennett, a senior foreign-exchange strategist in London at Calyon, the investment-banking unit of Credit Agricole SA.
Japan’s currency strengthened 0.9 percent to 125.01 per euro as of 10:58 a.m. in London, from 126.14 in New York yesterday. It earlier traded at 124.39, the highest level since March 12. The yen appreciated to 96.04 per dollar from 96.77, after reaching 95.68, the strongest since March 12. The euro fell 0.2 percent to $1.3020.
Bank of America’s capital shortfall amounts to billions of dollars, the Journal reported. Both banks are objecting to the Federal Reserve’s preliminary report on the tests, and are expected to mount a detailed rebuttal, the newspaper said, citing people familiar with the matter.
‘Negative’ Article
“Today’s article is negative, but I don’t think it’s come as that big a shock to the market,” said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of financial assets. “It contributed to a tone in the markets where people were more than happy to take risk off the table.”
Treasury Secretary Timothy Geithner indicated on April 21 that stress tests would show most of the 19 biggest U.S. banks have enough capital and said those needing more may convert government preference shares into common stock as well as seeking investments from private sources. Regulators are scheduled to release results of the tests on May 4.
The yen also strengthened as stocks fell. The MSCI Asia Pacific index dropped 2.2 percent and the Dow Jones Stoxx 600 of European shares fell 2.3 percent. Futures on the S&P 500 were 1.8 percent lower.
The yen advanced against all 16 of the most-traded currencies after the spread of swine flu beyond Mexico prompted the World Health Organization to increase its global pandemic alert to the highest since it adopted the warning system in 2005. The number of cases in the U.S. rose to 40 and Mexico’s toll of flu-related deaths reached 149. U.S. officials yesterday recommended citizens avoid nonessential travel to Mexico, and the European Union told travelers to avoid outbreak areas.
‘Bad Time’
“The outbreak of the swine flu emerged at a bad time and threw cold water on investors who had just started to buy back riskier assets and currencies,” said Taisuke Tanaka, managing director and foreign-exchange strategist in Tokyo at Nomura Securities Co., a unit of Japan’s largest securities broker.
The euro climbed to a five-month high against the yen on April 6, having gained 11 percent between March 2 and April 6 on optimism the worst of the global financial turmoil may be over. The Australian dollar jumped nearly 19 percent against Japan’s currency between March 2 and April 13.
Mexico’s peso was little changed at 14.035 per dollar after plunging 5.3 percent yesterday. It earlier fell to 14.1007, the weakest level since April 1.
The euro fell for a second day versus the dollar. ECB policy makers may cut interest rates and signal they may pump additional money into the economy to push down borrowing costs when they meet next week.
‘Unconventional Measures’
The ECB stands “ready to use unconventional measures of quantitative easing” to increase the flow of credit, governing council member Ewald Nowotny said yesterday in New York. Executive board member Lorenzo Bini Smaghi will speak in Geneva today and fellow board member Juergen Stark will speak in Siegen, Germany tomorrow.
“The ECB doesn’t like to shock and surprise,” said Steven Barrow, head of G10 currency research in London at Standard Bank Plc. “We may get a buy the rumor, sell the fact response and see the market buy the euro when the ECB doen’t do anything as negative as the market feared.”
Investors in the past week added to bets the ECB will cut its 1.25 percent target lending rate at its next meeting on May 7. The implied yield on the three-month Euribor interest-rate futures contract for June delivery fell to 1.29 percent today from 1.335 percent a week ago.
New Zealand Dollar
The New Zealand dollar declined for a second day against the dollar and the yen on speculation the central bank will lower interest rates at a policy meeting this week.
There is a 40 percent chance of a half percentage point cut at the April 30 policy review, according to a Credit Suisse index based on swaps trading.
Benchmark rates are 3 percent in New Zealand and Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ assets.
“What will be important is how the bank talks about the long-end of the curve,” said Alex Sinton, a senior currency dealer at ANZ National Bank Ltd. in Auckland. “They are likely to make comments about keeping rates lower for longer.”
New Zealand’s dollar dropped 1.6 percent to 55.67 U.S. cents from yesterday in New York. It declined 2.3 percent to 53.49 yen.
