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Yen Falls as Global Stocks, U.S. Retail Rise; Carry Trade Gains

The yen dropped against most of its major counterparts as global stocks advanced and a government report showed U.S. retail sales rose for a ninth month, encouraging investors to seek higher yields.

The New Zealand dollar and other currencies tied to global growth prospects rallied against the greenback, yen and Swiss franc, which slid on a subdued outlook for interest-rate increases. The euro matched its 15-month high against the dollar as the currency region’s industrial output rose for a fifth month in February, stoking bets the European Central Bank will boost borrowing costs further.

“It’s back into the growth currencies today,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut. “The dollar is snared whichever way you look. On days when you have risk aversion, investors prefer the Swiss franc or the yen. When risk appetite picks up, there are far more central banks likely to increase rates before the Fed.”

The yen slid 0.1 percent to 121.10 versus the euro at 12:05 p.m. in New York, from 120.99 yesterday, when it touched 120.16, the strongest level since April 5. Japan’s currency was little changed at 83.60 against the dollar, compared with 83.58, after earlier declining 0.8 percent.

Japan’s currency pared its drop versus the dollar as U.S. stocks erased their gains. The Standard & Poor’s 500 Index was little changed after rising 0.6 percent. The MSCI World Index advanced 0.4 percent after tumbling 1.1 percent yesterday.

A yen-funded carry trade weighted equally to the Australian and New Zealand dollars returned 0.9 percent today, according to Bloomberg data.

Carry Trade ‘Momentum’

“Carry trades picked up momentum again, with the dollar, Swiss franc and yen giving back some of their early week gains versus the high yielders,” analysts led by Daniel Katzive at Credit Suisse Group AG in New York wrote in a research note to clients today. “The recovery in carry positions has mirrored a bounce in equities.”

Under the carry trade, investors borrow where interest rates are low to buy higher-yielding assets elsewhere. Japan’s zero to 0.1 percent target lending rate makes the yen popular for funding such transactions. The benchmark borrowing costs are 4.75 percent in Australia and 2.50 percent in New Zealand.

New Zealand’s dollar rose against all of its major counterparts tracked by Bloomberg, rising 1.1 percent to 66.17 yen and advancing 0.6 percent to 70.66 Swiss centimes after an index of house prices increased for a second consecutive month. The Australian dollar appreciated 0.8 percent to 87.95 yen as consumer confidence rose.

G-7 Intervention

Japan’s currency has remained weaker than 80 versus the U.S. dollar since March 18, when Group of Seven nations acted to curb gains in the yen and support Japan’s export-driven economy. The currency had rallied to a post-World War II record on speculation insurance companies would repatriate funds to help pay for earthquake damage.

“The injection of liquidity by the Bank of Japan amid G-7 support has been sufficient to stabilize sentiment,” said Aroop Chatterjee, a currency strategist at Barclays Plc in New York. “This has been really positive for yen-funded carry trades.”

The euro traded at $1.4467, compared with $1.4477, after reaching $1.4520, equaling yesterday’s peak, which was the highest level since January 2010.

European policy makers will raise their benchmark by 109 basis points, or 1.09 percentage points, over the next 12 months, according to a Credit Suisse Group AG index based on swaps. A similar gauge for the U.S. predicts the Federal Reserve will increase rates by 46 basis points over the same period.

ECB Rate

ECB President Jean-Claude Trichet and colleagues boosted the main refinancing rate on April 7 to 1.25 percent from a record low 1 percent.

“When you look at what’s happening with the euro, it is driven on aggressively priced-in ECB tightening,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We believe much of that story has played out, and there will be a reversal.”

Bennenbroek, who according to Bloomberg data was the best currency forecaster in the six months ended March 31, expects the euro to drop to $1.32 in 12 months.

IntercontinentalExchange’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, was little changed at 74.866 following an intraday gain of 0.2 percent after three straight days of declines.

U.S. retail sales advanced 0.4 percent in March after a revised gain of 1.1 percent in the previous month, the Commerce Department reported.

China’s yuan snapped two days of losses as the Economic Information Daily reported that banks’ reserve ratios may be increased by 50 basis points on April 15 or April 22.

The yuan, whose daily trading range is restricted by the government, strengthened 0.1 percent to 6.5333 per dollar after appreciating to 6.5320, the strongest level since the country unified official and market exchange rates at the end of 1993.

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