Yen Advances as Slower U.S. Growth, Spain Cut Spur Demand

The yen rose against most of its major counterparts after the U.S. economy grew less than forecast and Standard & Poor’s cut Spain’s credit rating, adding to concern Europe’s debt crisis is worsening.

The yen also gained amid concern new Bank of Japan stimulus won’t be enough to boost the nation’s growth. Higher-yielding currencies including those of New Zealand and Canada climbed versus the U.S. dollar after slower growth in first-quarter gross domestic product revived bets the Federal Reserve won’t be quick to abandon efforts to support the economy.

“Some investors had prepositioned for a more aggressive BOJ, and the BOJ did the minimum in terms of meeting expectations,” said Aroop Chatterjee, a currency strategist at in New York. “The market has taken back some of those yen shorts.” A short is a bet a currency will fall.

The yen strengthened 0.9 percent to 80.27 per dollar at 5 p.m. in New York, extending its weekly rally to 1.6 percent. It touched 80.22, the strongest level since Feb. 28. The Japanese currency advanced 0.6 percent to 106.40 per euro and touched 106.16, the strongest since April 18. The euro rose 0.3 percent to $1.3255, gaining 0.3 percent for the week.

Canada’s dollar added 0.4 percent to 98.04 cents per U.S. dollar, boosting its advance this week to 1.2 percent, the most this year. America is Canada’s biggest trade partner. New Zealand’s dollar, nicknamed the kiwi, appreciated 1 percent to 82.25 U.S. cents in its third daily gain.

“We do think the Canadian dollar, from a medium-term perspective, is attractive because we believe in the U.S. economic-growth story,” Chatterjee said.

Volatility Slides

Implied volatility on three-month options on Group of Seven nations’ currencies closed today at 8.87 percent, the lowest level since 2007, according to a JPMorgan Chase & Co. index. The average over the past 10 years is 10.6 percent.

Lower volatility tends to make investments in currencies of nations with higher benchmark rates more attractive because the risk in such trades is that market moves will erase profits.

The Japanese central bank increased the total size of its stimulus programs by 5 trillion yen ($62 billion). It’s boosting its asset-purchase fund to 40 trillion yen by June 2013, versus the previous target of 30 trillion yen by year-end, while paring by 5 trillion yen a separate program that provides funds to banks. Economists had forecast a boost ranging from 5 trillion yen to 10 trillion yen, according to a Bloomberg News survey.

‘Fairly Disappointing’

The BOJ move was “was fairly disappointing, so the temptation to sell the yen was weakened,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York.

The yen rose the most over the past month among 10 developed-nation currencies monitored by Bloomberg Correlation- Weighted Indexes, adding 3.5 percent. The dollar dropped 0.5 percent, and the euro lost 1 percent.

The 17-nation currency fell earlier against the dollar after S&P cut Spain’s long-term credit rating yesterday by two steps to BBB+ from A. It said the nation’s outlook is negative as the recession undermines efforts to trim its budget deficit.

The Spanish unemployment rate increased to an 18-year high of 24.4 percent in the first quarter, from 22.9 percent in the previous three months, the National Statistics Institute said in Madrid.

“Spain is the main story in Europe now,” said Geoff Kendrick, head of European currency strategy at Nomura International Plc in London.

U.S. GDP

The dollar extended a loss versus the euro after Commerce Department data showed U.S. gross domestic product expanded in the first quarter at a 2.2 percent annual rate. That followed a 3 percent pace from October through December and compared with the 2.5 percent median forecast in a Bloomberg survey.

“We’re seeing a little bit more risk appetite,” said Kathy Lien, director of currency research with online trading firm GFT Forex in New York. “There’s still a little bit of nervousness in the market. Overnight we had the Spanish downgrade and as a result of that you’re only seeing very, very modest gains in euro-dollar.”

While the Fed refrained this week from new actions to boost the economy, Chairman Ben S. Bernanke said after a two-day meeting the central bank is “prepared to do more” if necessary. Policy makers repeated a plan to keep borrowing costs “exceptionally low” until at least late 2014. The key interest rate has been at zero to 0.25 percent since December 2008.

Operation Twist

The Fed kept intact its program to exchange $400 billion in shorter-term holdings for longer-term debt to cap borrowing costs, dubbed Operation Twist and scheduled to expire in June.

Hedge funds and other large speculators decreased bets the euro will fall against the dollar. Net short positions in the shared currency fell to 113,367 contracts in the week ended April 24, from 118,125 the previous week, according to Commodity Futures Trading Commission data.

The dollar is losing momentum against the yen after it repeatedly failed to breach the 81.78 level, UBS AG said.

The 81.78 level is the 38.2 percent Fibonacci retracement of the greenback’s drop from a high of 84.18 yen reached on March 15 to a low of 80.30 yen on April 16, according to data compiled by Bloomberg. It last touched 81.78 on April 20.

The failure of the dollar to break through that level “is now turning momentum lower within what is still a bearish trending condition,” Richard Adcock, London-based head of fixed-income technical strategy at UBS in London, wrote in a report yesterday. Resistance is an area on a chart where orders may be clustered.

The pound rose for a 10th day against the dollar, its longest winning streak since June 1992, and climbed to the strongest level against the euro in almost 22 months.

The U.K. currency gained 0.5 percent to $1.6265 and touched $1.6281, the highest since Aug. 31. The pound appreciated 0.2 percent to 81.49 pence per euro. It reached 81.34 pence, the highest since June 30, 2010.

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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