Yen Drops as Volatility at Three-Year Low Spurs Demand for Higher Yields

The yen weakened beyond 81 against the dollar and fell to its lowest level since November against the euro as three-year low foreign-exchange volatility and signs of global growth prompted demand for higher-yielding currencies.

South Africa’s rand and Norway’s krone climbed as a measure of U.S. consumer sentiment for February rose higher than economists predicted. The euro strengthened a third day as officials prepared to address the debt crisis when Group of 20 nations meet tomorrow. The yen extended its drop against the dollar to 4.3 percent since the Bank of Japan unexpectedly expanded its asset-purchase program on Feb. 14.

“The data out of the U.S. is above expectations and that’s helping to encourage more of a risk-on environment,” said David Mann, regional head of research for the Americas at Standard Chartered Plc in New York. “Alongside an increasing amount of calm about the risks that remain in Europe, it looks like people are focusing on the excessive short euro positions.” A short is a bet the price of an asset will fall.

The yen dropped 1.5 percent against the dollar to 81.20 at 5 p.m. New York time after touching 81.22, the weakest since July 8. Japan’s currency fell 2.1 percent, its largest intraday drop since Oct. 31, to 109.18 per euro. It touched 109.25, its weakest level since Nov. 1 and has dropped a 4.4 percent drop since Feb. 17, the third-straight weekly decline. The euro rose to more than $1.34 for the first time since Dec. 9, trading 0.6 percent higher at $1.3448.

Futures traders decreased their so-called net-short positions on the euro versus the dollar to 142,159 contracts in the week ended Feb. 21. The positions reached a record high of 171,347 last month.

Pound Rises

The pound rose for a second day against the dollar after the government’s economic-growth report showed consumer spending rose more than analysts forecast, boosting speculation the U.K. will avoid a recession.

The British currency rose 0.8 percent to $1.5875 and added 0.3 percent to 84.72 pence per euro, snapping four days of losses against the common currency.

The implied volatility of three-month options on G-7 currencies as tracked by the JPMorgan G7 Volatility Index (JPMVXYG7) fell to 9.71 percent, the least since Aug. 8, 2008, as options traders scaled back the risk of large exchange-rate swings. Lower volatility makes investments in currencies with higher benchmark rates more attractive because the risk in such trades is that market moves will erase profits.

‘Risk-Taking Environment’

“We are moving gradually into a risk-taking environment,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “The policy stance of the Japanese government, low volatility and signs of economic recovery are putting the yen on the defensive.”

The BOJ said this month it would expand its asset-purchase program to 30 trillion yen ($372 billion) from 20 trillion, with 19 trillion yen set aside for government bonds. The central bank also said it will target 1 percent inflation “for the time being.”

The euro had a seventh-straight advance against the yen, the longest run since January 2010, after demand was boosted by the prospect that G-20 officials meeting this weekend may discuss committing further resources to Europe’s debt crisis.

The currency pair broke above its 200-day moving average, at 107.12, for the first time since August.

Japan, Norway

Japan’s currency has tumbled 7 percent in the past month, the biggest loser among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The dollar weakened 2.3 percent and the euro rose 1.1 percent. Norway’s krone was the biggest gainer, strengthening 3.8 percent.

The krone rose for a third day versus the greenback, gaining 0.7 percent to 5.5745 per dollar.

The dollar weakened as the Thomson Reuters/University of Michigan final index of consumer sentiment for February rose to 75.3 from 75 at the end of last month. Economists projected a reading of 73 after a preliminary figure of 72.5, according to the median estimate in a Bloomberg News survey.

A separate survey showed purchases of new homes in the U.S. exceeded forecasts in January after climbing a month earlier to a one-year high. Sales, tabulated when contracts are signed, fell 0.9 percent to a 321,000 annual pace from a 324,000 rate in December that was stronger than previously reported, figures from the Commerce Department showed today in Washington.

“The U.S. data is improving and no doubt that’s adding to the positive sentiment,” said Tony Allen, global head of foreign-exchange trading in Sydney at Australia & New Zealand Banking Group Ltd. “Higher equity markets in the States equals higher risk currencies.”

Bank Downgrades

Australia’s dollar lagged behind other commodity currencies after Fitch Ratings downgraded three of the nation’s four so- called pillar banks. Fitch reduced the ratings of Commonwealth Bank of Australia, Westpac Banking Corp. and National Australia Bank Ltd. by one level to AA- from A, citing their dependence on wholesale funding markets that are “vulnerable to swings of confidence.”

The Aussie fell 0.2 percent to $1.0694. It fell against most of its 16 major counterparts.

The rand gained 0.8 percent to 7.5986 per U.S. dollar, strengthening 1.9 percent since Feb. 17. The Canadian dollar fell 0.2 percent to 99.93 cents per U.S. dollar. It reached 99.07 cents on Feb. 20, the strongest since Oct. 28.

‘Supply Shock’

Barclays Plc recommended investors bet on the depreciation of the euro against an equally weighted basket of the dollar and Norway’s krone before a three-year loan offering from the European Central Bank scheduled for next week.

Financial institutions will ask the ECB for 470 billion euros ($630 billion) in three-year funds for allotment on Feb. 29, the median of 28 estimates in a Bloomberg survey showed.

The second three-year longer-term refinancing operation “is likely to be more of a liquidity supply shock and weaken” the euro, Paul Robinson, global head of foreign-exchange research at Barclays in London, wrote in a research note yesterday.

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

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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