Yen Strengthens as Growth Concern Persists After Fed Pledge; Dollar Gains

The yen gained against the majority of its most-traded counterparts as the Federal Reserve’s pledge to keep interest rates at a record low until mid-2013 failed to convince investors global growth will be buoyed.

The euro fell against the dollar amid speculation Europe’s debt crisis would spread to France, the region’s second-biggest economy. The greenback gained against most major peers. The Swiss franc weakened versus the yen and dollar after the nation’s central bank said it expanded measures to curb the currency’s strength.

“The Fed statement may have fallen a little bit short of what some in the market were hoping for,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. “The Fed clearly and very bluntly highlighted the weakness in the economy. The market is not really going to find too much solace in that statement given that all these uncertainties and all these headwinds remain.”

The Japanese currency strengthened 1.5 percent against the euro to 108.97 at 5 p.m. in New York, from 110.63 yesterday. The yen rose 0.1 percent to 76.86 per dollar and touched 76.35, approaching the post-World War II high of 76.25 that it reached on March 17. The franc fell 0.8 percent to 72.66 centimes per dollar, down from an all-time high of 70.71 centimes yesterday. It rose 0.6 percent to 1.0300 per euro after reaching a record 1.0075 yesterday.

The dollar gained 1.4 percent to $1.4178 per euro, from $1.4376 yesterday, when it weakened 1.4 percent.

15 Percent Rise

The franc surged 15 percent over the past month against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Currency Indexes. The yen rose 3.6 percent. The dollar fell 1.2 percent, and the euro lost 0.1 percent.

The greenback pared losses against the yen after a Treasury Department auction of $24 billion of U.S. 10-year notes drew a record low yield of 2.14 percent. It was the first offering of the maturity since Standard & Poor’s cut the U.S. credit rating last week to AA+, from AAA.

“The downgrade notwithstanding, there’s still a general flight to quality and the U.S. is still perceived as that,” said John McCarthy, managing director of currency trading at ING Groep NV in New York.

Japanese Finance Minister Yoshihiko Noda said in parliament today that one-sided moves in the yen can hurt the nation’s growth. The currency strengthened to 76.97 on Aug. 4 before the nation sold yen that day to weaken it.

Speculation on France

The euro slid as shares of Societe Generale SA, France’s second-biggest lender, plunged 15 percent, the most in more than 2 1/2 years, after speculation France’s creditworthiness was in doubt. BNP Paribas SA, France’s largest bank, slid 9.5 percent and Credit Agricole SA slumped 12 percent.

France’s top credit grade was affirmed by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings as yields on the nation’s debt climbed.

France’s borrowing costs are rising as Europe’s debt crisis makes investors wary of lending to any nation other than Germany. Investors currently demand about 90 basis points, or 0.9 percentage point, of extra yield to buy 10-year French debt rather than German bunds, even though both carry AAA grades from the major rating companies. That spread is almost triple the 2010 average of 33 basis points.

The European Central Bank purchased Spanish and Italian government bonds for a third day, according to four people with knowledge of the transactions, to drive yields lower. The amount of securities acquired was smaller than in the past two days, said one of the people, who asked not to be identified because the trades are confidential.

Fed’s Pledge

The Fed pledged yesterday to keep its benchmark interest rate at zero to 0.25 percent at least through mid-2013 to revive a recovery that’s “considerably slower” than anticipated. The U.S. central bank is “prepared to employ” additional tools to bolster an economy hobbled by weak hiring and anemic household spending, it said in a statement.

The central bank statement helped the Standard & Poor’s 500 Index rally 4.7 percent yesterday. It fell 4.4 percent today, while the Stoxx Europe 600 lost 3.8 percent.

“You’re looking at a pullback today,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “It seems like the rally yesterday wasn’t sustainable.”

Swiss National Bank

The Swiss National Bank said in a statement it will “significantly increase” the supply of liquidity to the money market and expand banks’ sight deposits, or cash that can be withdrawn on demand, to 120 billion Swiss francs ($165 billion) from 80 billion francs. It will also conduct foreign-exchange swap transactions to create liquidity. The measure was last used in 2008, the SNB said.

The pound depreciated versus the dollar as the Bank of England said the outlook for growth has weakened and the most likely scenario is that inflation will fall below its target in the medium term. Sterling dropped 1.1 percent to $1.6134 and rose 0.3 percent to 87.87 pence per euro.

South Korea’s won rose against all 16 of its most-traded counterparts tracked by Bloomberg after Statistics Korea said today the nation’s jobless rate was unchanged at 3.3 percent in July. The won gained 0.7 percent to 1,080.20 per dollar.

New Zealand’s dollar and Mexico’s peso were the worst performers among major currencies. The South Pacific currency dropped 3.1 percent to 81.12 U.S. cents, and the peso tumbled 4.1 percent to 12.5536 per dollar.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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