Yen Advances Amid Bets BOJ Action Priced In; Euro Falls

The yen gained for a second day versus the dollar, extending a rally from a 29-month low, amid ebbing risk appetite and speculation the currency’s three-month slide already incorporates proposed stimulus measures.

The euro dropped for the first time in three days before the European Central Bank meets this week. The yen gained versus all of its 16 most-traded peers even as Finance Minister Taro Aso said Japan will buy euro-denominated sovereign debt to help weaken the currency. Stocks fell. Sweden’s krona declined after minutes of the central bank’s December meeting showed two policy makers considered a deeper interest-rate cut.

“Yen’s lost about 5 to 7 percent of its value in the last few weeks,” Peter Gorra, chief dealer in New York at BNP Paribas SA, said in an interview on Bloomberg Television’s “Lunch Money” with Sara Eisen. “We could see just a little bit of unraveling of those positions, where the yen strengthens maybe another 50 to 100 basis points. Then you see the continued devaluation.” A basis point is 0.01 percentage point.

The yen appreciated 0.9 percent to 87.05 per dollar at 5 p.m. in New York after sliding on Jan. 4 to 88.41, the weakest level since July 2010. Japan’s currency climbed 1.1 percent to 113.86 per euro and touched 113.64, the lowest level this year. Europe’s shared currency weakened 0.3 percent to $1.3081 after closing 0.4 percent higher yesterday.

The yen may depreciate to 90 per dollar, Gorra said. That would be the weakest level since June 2010.

The Standard & Poor’s 500 Index fell as much as 0.7 percent before paring the decline to 0.3 percent.

Worst Performer

The yen tumbled 12 percent over the past three months, the worst performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar weakened 0.7 percent, while the euro gained 1 percent.

Indonesia’s rupiah slid against all 31 of its most-traded peers tracked by Bloomberg, touching the weakest level since September 2009 versus the greenback, after the government said its failure to reach its spending target last year crimped economic growth. The currency depreciated as much as 1.8 percent to 9,847 per dollar.

The euro headed toward its 50-day moving average of $1.2996 after failing to breach it for the past two days. Moving averages, which indicate momentum, are seen by some traders as potential turning points in the direction of a currency’s price. The ECB meets Jan. 10.

“We did have a decent move higher in the euro yesterday, so we’re kind of taking back some of yesterday’s gains,” Michael LaVina, a senior trader in Stamford, Connecticut, at Faros Trading LLC, said in a telephone interview.

Relative Strength

The yen’s 14-day relative strength index (SPX) versus the dollar ended the day at 30.8, just above 30, a level some traders view as a signal an asset has fallen too far, too fast. It was 20.9 yesterday.

The Bank of Japan (8301) next meets Jan. 21-22. Policy makers boosted stimulus at their previous gathering in December while refraining from raising their inflation goal from 1 percent. Newly elected Prime Minister Shinzo Abe called for a doubling of the inflation measure.

Japan will use foreign-exchange reserves to buy European Stability Mechanism bonds to help weaken the yen, Aso told reporters today in Tokyo. The decision will also help the “financial stability of Europe,” he said.

The Japanese government will watch the currency market “closely” and will strengthen cooperation with the BOJ to counter deflation, according to a draft of its emergency economic measures released today. Abe said on Jan. 1 that “bold” monetary policy was one of the three prongs of his economic plan.

‘Desired Effect’

“The rhetoric worked -- it had the desired effect of weakening the yen without intervention,” Alfonso Esparza, senior currency analyst in Toronto at the online currency trading firm Oanda Corp., said in a telephone interview. “On pure fundamentals, it’s very easy to see Japan being more proactive weakening the yen. That will work for short periods of time, as we’ve seen, and then there will be a bounce back.”

Sweden’s krona fell versus its 16 major counterparts after the minutes of the central bank’s Dec. 17 meeting showed deputy governors Per Jansson and Barbro Wickman-Parak “thought a great deal” about cutting the repurchase rate by half a percentage point last month. The Riksbank on Dec. 18 lowered its benchmark by a quarter of a percentage point to 1 percent.

The krona declined 0.7 percent to 8.5822 per euro and slid 0.9 percent to 6.5608 per dollar.

Pound Declines

The pound fell toward the weakest level in a month against the dollar before a Bank of England meeting this week. Policy makers are forecast to keep interest rates at a record low as they struggle to stoke a recovery. The U.K. economy shrank 0.1 percent last year, while the U.S. expanded 2.2 percent, according to a Bloomberg News surveys.

“U.S. growth is outperforming U.K. to such an extent that the last time we saw this kind of a differential was pretty much in the 1980s,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “Definitely you’ll see lower levels in cable over the course of the year,” he said, referring to the pound-dollar exchange rate.

The pound dropped 0.4 percent to $1.6056 after falling to $1.6010 on Jan. 4, the lowest level since Dec. 7. The U.K. currency slipped 0.1 percent to 81.48 pence per euro.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

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