Yen Leads Weekly Gains on Ukraine Safety Demand; Ruble Plunges

The yen posted the biggest weekly gain among the dollar’s 31 major peers as escalating tension in Ukraine spurred investor demand for the safest assets.

The ruble fell with emerging-market currencies as German Chancellor Angela Merkel said Group of Seven nations are preparing new measures against Russia. China’s yuan dropped to a 16-month low on a slowdown in growth in the world’s second-biggest economy. The dollar was little changed versus a basket of peers before the Federal Reserve is forecast to continue tapering its bond-buying program when it meets next week.

“Against a backdrop of limited, new fundamental drivers, the Ukraine-Russia situation has received more focus,” Robert Lynch, a currency strategist at HSBC Holdings Plc in New York, said in a phone interview. “That has contributed to a modest wave of risk-off bias, weighing on dollar-yen.”

The yen strengthened 0.3 percent this week in New York to 102.16 per dollar and reached 101.96 yesterday, the highest since April 17. Japan’s currency appreciated 0.1 percent to 141.30 per euro. The single currency added 0.2 percent to $1.3834.

The Bloomberg Dollar Spot Index (INDEXCF), which tracks the U.S. currency against 10 of its major counterparts,closed the week at 1,011.02 after rising to 1,012.74 yesterday, the highest level since April 8.

Winners, Losers

A custom Bloomberg index with equal weightings of the dollar’s 20 major emerging-market peers fell the most in three months, dropping 0.6 percent to 91.86. Romania’s leu, gaining 0.4 percent, was one of only four among 24 developing-economy currencies tracked by Bloomberg to advance versus the dollar.

The Swiss franc joined the yen in leading gains among 16 major currencies against the dollar this week, adding 0.2 percent. South Africa’s rand fell the most, dropping 1.5 percent, followed by Mexico’s peso, down 0.6 percent.

The ruble declined yesterday after Standard & Poor’s cut Russia’s sovereign-debt rating to BBB-, the lowest investment grade. The rank, on par with Brazil and Azerbaijan, has a negative outlook. The company said further downgrades are possible if economic growth deteriorates and the conflict in Ukraine sparks wider sanctions.

The currency extended the drop even after the central bank increased its key interest rate to 7.5 percent from 7 percent. All but one of 23 economists in a Bloomberg survey predicted policy makers would keep the rate unchanged. One projected an increase to 8 percent.

Invasion ‘Fears’

Russia’s legal tender slid 1.3 percent this week to 42.2707 versus the central bank’s target basket.

“The rate increase may discourage speculators somewhat in the near term, but I don’t think it changes the big picture,” said Bhanu Baweja, head of emerging-market strategy at UBS AG in London. “If fears of Russia invading eastern Ukraine do come to fruition, this rate hike will not be enough to stabilize the currency.”

The Standard & Poor’s 500 Index erased a weekly gain as Obama spoke on a conference call yesterday with leaders from Germany, France, the U.K. and Italy. Russia’s troops began military exercises on its neighbor’s border and explosions in two Ukrainian cities wounded eight people.

“The market is clearly concerned about the conflict, but the impact appears to be more visible in stock markets than in the currency market,” said Kit Juckes, a global strategist at Societe Generale SA in London. “I don’t think the forex market is being complacent. It’s just that it can’t afford in a zero-rate world to bet against the idea that this is probably not going to escalate beyond a war of words.”

Stocks Tumble

The S&P 500 (SPX) slid 0.1 percent on the week, while the MSCI Emerging Markets Index dropped 1.8 percent and Russia’s Micex Index plunged 5.6 percent.

Demand for haven assets propelled a 2.7 percent gain in the Japanese currency this year, the third-best performer among 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The dollar fell 0.7 percent and the euro was little changed.

Futures traders decreased their bets that the yen will decline against the greenback. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- net shorts -- was 67,243 on April 22, compared with net shorts of 68,716 a week earlier.

China ‘Pessimism’

In China, the yuan fell for six straight days, the longest losing streak in two months. Credit Suisse Group AG’s Chief Regional Economist Dong Tao said at a conference in Hong Kong on April 24 that he’s pessimistic on the short-and medium-term outlooks. The current-account surplus was $7.2 billion in the first quarter, compared with $47.6 billion in the first three months in 2013, official data showed yesterday.

The yuan dropped 0.5 percent to 6.2536 per dollar on the week and touched 6.2583 yesterday, the weakest level since December 2012.

“The pessimism on China remains and officials may prefer a weaker yuan to steer export growth,” said Daniel Chan, a Hong Kong-based strategist at China Silver Global Investment Consultant Ltd. “The next key level is 6.3, at which we may see another round of unwinding in structured products, and so the selling pressure is still on.”

The Fed meets April 29-30, when economists predict the central bank will cut monthly asset purchases by another $10 billion to $45 billion. Policy makers will continue to taper at that pace until ending the program at its Oct. 28-29 meeting, according to a Bloomberg survey.

JPMorgan Chase & Co.’s Group of Seven Volatility Index dropped for a fourth week, falling 43 basis points, or 0.43 percentage point, to 6.22, the lowest since July 2007. The gauge jumped to 26.55 percent in October 2008 during the global financial crisis.

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Kenneth Pringle, Greg Storey

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