Yen Gains Amid Central-Bank Speculation; Euro Weakens

The yen gained versus the dollar, headed for its biggest monthly rally since July, as investors speculated the Federal Reserve won’t be quick to abandon efforts to support the U.S. economy.

The euro fell versus most major peers this week after Standard & Poor’s downgraded Spain, fueling bets Europe’s debt crisis is spreading. The yen also rose amid concern new Bank of Japan stimulus won’t be enough to spur growth. The dollar dropped as 10-year Treasury yields slid for a sixth week, damping the appeal of U.S. debt over Japanese bonds. U.S. jobs growth remained below 200,000 in April, data next week may show.

“To a surprising degree, the yen has been very much correlated with U.S. yields,” Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, said yesterday. “There was also a bit of disappointment in the Bank of Japan.”

The yen strengthened 1.6 percent to 80.27 per dollar yesterday in New York, from 81.52 a week earlier. It reached 80.22, the strongest level since Feb. 28. The Japanese currency has gained 3.2 percent in April, the most since a 5 percent rise in July. The yen advanced 1.3 percent to 106.40 per euro. The 17-nation currency rose 0.3 percent to $1.3255.

U.S. 10-year note yields fell three basis points over the past five days, or 0.03 percentage point, to 1.94 percent. They last ended a stretch of six weekly losses in June.

‘Fairly Disappointing’

The BOJ said April 26 it will boost its asset-purchase fund to 40 trillion yen ($498 billion) by June 2013, compared with the previous target of 30 trillion yen by year-end. A separate central-bank program providing funds to banks was pared by 5 trillion yen amid lackluster demand for loans. Economists had expected an increase of as much 10 trillion yen to the nation’s stimulus program.

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

The yen rose 3.5 percent over the past month versus nine developed-nation counterparts monitored by Bloomberg Correlation-Weighted Indexes, the best performer. The dollar declined 0.5 percent, and the euro fell 1 percent. The pound advanced 1.7 percent.

The Dollar Index fell for a second week as the Fed repeated a plan to keep its key interest rate “exceptionally low” through at least late 2014 and a government report showed America’s economy expanded in the first quarter less than forecast.

Growth Slows

U.S. gross domestic product grew at a 2.2 percent annual rate, Commerce Department data showed yesterday. That followed a 3 percent pace from October through December and compared with a 2.5 percent median forecast in a Bloomberg survey.

While the Fed refrained at a two-day meeting this week from new actions to boost the economy, Chairman Ben S. Bernanke said the central bank is “prepared to do more” if necessary.

U.S. payrolls added 165,000 jobs in April, economists in a Bloomberg survey forecast before Labor Department data due May 4. The March report showed 120,000 new jobs, versus a forecast of 205,000. It was the first time in four months the number was below 223,000.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, dropped 0.6 percent to 78.709.

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.

Rand, Peso

Higher-yielding currencies including South Africa’s rand and Mexico’s peso climbed against the greenback this week as risk appetite increased. The rand gained 0.9 percent to 7.7445 per dollar, and the peso gained 1 percent to 12.9678. Interest rates in the two nations are 5.5 percent and 4.5 percent, compared with virtually zero in the U.S. and Japan.

The implied volatility of three-month options for Group of Seven currencies closed yesterday at 8.87 percent, the lowest level since 2007, according to the JPMorgan Volatility Index. Lower volatility makes 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 euro slid as political turmoil fanned concern the debt crisis will worsen. Francois Hollande, the leading candidate to become France’s next president, said the country won’t ratify Europe’s fiscal pact in its current form if he’s elected.

‘Hostile Dynamic’

“It’s the fact that you’ve got someone in France who is not aligned with Germany, and what it means is you’re going to see more of a hostile dynamic between Germany and France, rather than a cooperative one,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York said April 23.

S&P cut Spain’s long-term credit rating by two steps to BBB+ from A on April 26, saying the outlook is negative as the recession undermines efforts to trim the nation’s budget gap.

Sterling rallied versus 13 of its 16 most-traded peers this week even as a government report on April 25 showed the U.K. slipped back into recession. The currency reached an eight-month high against the dollar, touching $1.6281, and climbed to a 22-month high versus the euro, 81.34 pence.

U.K. consumer confidence climbed last month more than economists estimated, data showed. A Nationwide Building Society index of sentiment rising to 53, from 44 the previous month.

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