The yen fell for a second day against the dollar on speculation the Bank of Japan will intervene to weaken the currency after it climbed to a seven- month high last week. The yen dropped versus 13 of its 16 major counterparts as importers sold the currency and technical indicators signaled the recent rally was overdone. The euro weakened from a two- month high against the dollar as European equity markets declined, pushing the Stoxx Europe 600 Index down 0.3 percent. The Australian dollar snapped a three-day losing streak as gains in Asian shares spurred demand for higher-yielding assets. “The yen weakened as the risk background was more positive, along with the talk of BoJ intervention,” said Adam Cole, head of global currency strategy at Royal Bank of Canada in London. “The yen’s move against the Aussie dollar in particular indicated a better bid for risk. The euro retreated as equities reached their lows for the day, and that spilled over into the currency market.” The yen declined to 86.78 per dollar as of 6:29 a.m. in New York, from 86.69 yesterday, after climbing to 86.27 on July 16, the strongest since Dec. 1. The euro dropped 0.1 percent to 112.06 yen, and fell 0.2 percent to $1.2912. It reached $1.3029 earlier today, the highest level since May 10, on optimism stress-test results from European banks this week will show the region’s debt crisis is easing. The Australian dollar strengthened 0.8 percent to 87.52 U.S. cents and 1 percent to 76.01 yen. Poised to Rally The dollar’s 14-day relative strength index against the yen, a gauge that compares the magnitude of gains and losses, was at 29 yesterday, below the 30 threshold that some traders see as a sign a price has fallen too far and is poised to rally. The Bank of Japan may ease monetary policy if the yen stays around 85 against the dollar, Dow Jones Newswires reported yesterday. Central bank Governor Masaaki Shirakawa said last week a stronger yen and stock declines may hurt the economy. The yen also weakened on speculation Japanese importers took advantage of its recent surge to sell the currency. “There’s talk that importers are selling the yen,” said Shinichi Hayashi, a dealer in Tokyo at Shinkin Central Bank, the central institution for Japan’s financial cooperatives. “The 86 yen level hasn’t been seen by them for a while, so they’re probably buying dollars.” Japan’s large manufacturers expect the yen to average 90.16 versus the greenback in the six months to March 2011, according to Bank of Japan’s quarterly Tankan survey released July 1. The central bank has limited measures it can use should it wish to weaken the yen, according to Bank of Tokyo-Mitsubishi UFJ Ltd. ‘More of the Same’ “The BoJ appears only willing to offer more of the same -- a possible increase in Japanese government bond purchases, or more likely a further increase in its lending facility to financial institutions,” Derek Halpenny, European head of global currency research, wrote in a report. “Bar outright intervention, which we doubt is being considered at present, the yen will remain at the mercy of the direction of global yields.” European regulators are examining the strength of 91 banks to determine whether they can survive potential losses on sovereign-debt holdings. Results will be released July 23. Spanish officials including Finance Minister Elena Salgado said last week they’re confident about the results of the stress tests on Spanish banks. Stress Tests “Our bank credit analysts expect positive results and favor being long risk heading into the release of the European bank stress tests,” said David Forrester, a currency economist at Barclays Capital in Singapore. “For the euro, we expect an initial rally, but the most important change would be a reduction in the likelihood of a large downside move.” The euro’s gains are close to petering out amid “fragile market confidence,” Royal Bank of Scotland Group Plc said. “Confidence will take a hit if European economic growth begins to fade,” Greg Gibbs, a currency strategist at RBS in Sydney, wrote in a report. “It’s hard to see confidence in European debt markets improving further from here. Perhaps the stress tests will deliver one more spurt of confidence. But it’s close to a peak and so is the euro.” Australia’s dollar strengthened versus all 16 major currencies as the S&P/ASX 200 Index of shares rose 1 percent and China’s Shanghai Composite Index advanced 2.2 percent. China Consumption China’s commerce ministry said domestic consumption will expand at a relatively fast pace and become the most important element of growth in the nation, which is Australia’s largest trading partner. The country may revise its loan targets higher, while investment project approvals may be eased by the fourth quarter, Morgan Stanley economists Qing Wang and Steven Zhang wrote in a note to clients. “There’s talk about China ramping up the pace of infrastructure spending and toning down the severity of curbs on the property markets,” said Imre Speizer, a market strategist in Wellington at Westpac Banking Corp. “China growth means more demand for Aussie and kiwi commodities, supporting the currencies.” Reserve Bank of Australia officials said in minutes of their July 6 meeting released today that they’ll use the results of European bank stress tests and local inflation figures due next week to decide whether to resume raising interest rates. The Canadian dollar rose for a second day against its U.S. counterpart on speculation the nation’s central bank will increase borrowing costs today. Canadian Rates The Bank of Canada will raise its policy rate by a quarter- percentage point to 0.75 percent, according to all 20 economists surveyed by Bloomberg. Governor Mark Carney became the first Group of Seven central banker to lift borrowing costs since the global financial crisis on June 1, increasing the benchmark to 0.5 percent. “We remain constructive on the Canadian dollar and expect to see further support coming through as the BOC looks likely to gradually tighten monetary conditions over the months ahead,” Amelia Bourdeau, a currency strategist in Stamford, Connecticut, at UBS AG, wrote in a research note yesterday. Canada’s dollar strengthened 0.1 percent to C$1.0537 per U.S. dollar. To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

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