Yen Weakens After China’s Rate Cut, Dollar Pares Loss

The yen fell against most its major counterparts after China cut its key interest rates for the first time since 2008, damping appetite for refuge assets.

The dollar pared losses as Federal Reserve Chairman Ben S. Bernanke refrained from signaling additional steps the central bank might take to spur growth, during congressional testimony. The euro touched to a two-week high versus the dollar earlier as German Chancellor Angela Merkel said the nation is ready to back euro-area financial instruments. The pound rallied after the central bank kept stimulus plans on hold.

“You had the risk-on sentiment going into the Bernanke comments because of the China cut and Germany seems to be softening its stance a little bit,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “Bernanke wants to keep his cards close to his chest, so as not to sway thinking too much in case there is a big dissension, so we’ve turned around a little bit.”

The yen depreciated 0.6 percent to 79.63 per dollar at 5 p.m. New York. The U.S. currency added 0.2 percent to $1.2561 per euro, after losing as much as 0.3 percent. The euro rose 0.4 percent to 100.02 yen.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.1 percent to 82.281. It touched 81.911, the lowest level since May 28.

Listed Levels

South Korea’s won was the biggest winner against the yen, followed by the Norway’s krone and Sweden’s krona.

“The way it’s played out is through a positive move in risk appetite,” said Adam Cole, global head of foreign-exchange strategy in London at Royal Bank of Canada’s RBC Capital Markets. “The beneficiary that is less widely recognized is a country whose trade is very much dominated by China and increasingly so, is Japan, so that maybe a side effect that is less widely appreciated that maybe intensifies the downward pressure on dollar-yen slightly.”

The yen weakened versus the dollar after touching an almost four-month high of 77.66 on June 1.

China’s benchmark one-year deposit rate will drop by 0.25 percentage point effective tomorrow, the People’s Bank of China said on its website. The one-year lending rate will also be cut by 0.25 percentage point, it said.

The Australian dollar rallied above parity with the greenback for the first time since May 15. The Aussie rose 0.8 percent to $1.0003 before trading at 98.94 U.S. cents. China is Australia’s largest trading partner.

Pound Strength

The pound rose 0.2 percent to $1.5528 and gained 0.4 percent to 80.90 pence per euro after the Bank of England refrained from announcing addition asset purchases at a meeting today.

The euro was supported as Jean-Claude Juncker, who leads the group of euro-area finance ministers said Spain would get euro-area bank aid. The nation’s short-term debt was downgraded to F2 from F1 by Fitch Ratings today. Its long-term outlook was negative.

Germany’s Merkel didn’t specify which financial instruments she was discussing.

“In view of the current difficulties, it’s important to emphasize that we have created the instruments of support in the euro zone, that Germany is ready to work with these instruments whenever that is necessary and that this is an expression of our firm desire to keep the euro area stable,” the chancellor told reporters at a joint press conference with British Prime Minister David Cameron.

German Policy

“Everyone is looking for Germany to capitulate at some point and come around from its recalcitrant stance, but we have to be cautious before we see it actually happen,” said Brian Kim, a currency strategist in Stamford, Connecticut at Royal Bank of Scotland Group Plc’s RBS Securities unit. “

The euro will meet resistance at the January low of $1.2624 and the May 21 high of $1.2824, according to data compiled by Bloomberg. The shared currency will find support versus the dollar at $1.2134. Resistance is an area on charts where sell orders may be clustered, while support is where buy orders may be pre-established.

The shared currency will finish the third-quarter at $1.25, according to the median estimate in a Bloomberg News Survey. The yen will weaken to 81 versus the greenback and the Dollar Index will weaken to 80.7, separate surveys show.

Bernanke Analysis

Bernanke said the economy is at risk from Europe’s debt crisis and the prospect of fiscal tightening in the U.S., while not signaling additional monetary easing.

“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said today in testimony to the Joint Economic Committee in Washington. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”

Fed Vice Chairman Janet Yellen said yesterday in Boston that slowing job growth and deteriorating financial-market conditions show the U.S. economy “remains vulnerable to setbacks” and may warrant additional monetary stimulus.

The policy-setting Federal Open Market Committee meets June 19-20.

The yen has dropped 3.3 percent in the past week, the worst performer among 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Indexes. The dollar slipped 1.1 percent and the euro was little changed.

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