Yen Drops as China Stimulus Bets Sap Demand for Haven

The yen declined against most of its 16 major peers amid speculation the People’s Bank of China will act to support growth in the world’s second-biggest economy, sapping the allure of the relative safety of Japan’s currency.

The yen halted its gain versus the dollar from yesterday after International Monetary Fund Deputy Managing Director Naoyuki Shinohara said the fund maintains its view that intervention can be used to avoid disorderly moves in the currency market. Australian’s dollar rallied from a three-month low reached as Chinese stocks climbed. Gains in the euro were limited before data from Italy tomorrow that economists say will show the nation’s industrial production dropped.

“Some traders have been noting that PBOC was injecting lots of liquidity into the market,” fanning speculation China will introduce more stimulus, said Lee Wai Tuck, currency strategist at Forecast Pte in Singapore. “You’d likely see selling of the yen” should such measures be introduced in China.

The yen fell 0.2 percent to 101.81 per euro as of 6:35 a.m. in London from the close yesterday. It slid 0.1 percent to 78.39 per dollar, following a 0.4 percent gain in New York. The 17-nation euro added 0.2 percent to $1.2988, after losing 0.6 percent yesterday.

China’s central bank auctioned 165 billion yuan ($26 billion) of seven-day reverse repos and 100 billion yuan of 28 day contracts today, according to a trader at a primary dealer required to bid at the sales. The monetary authority added a net 365 billion yuan using money-market operations in the final week of September, the most in data compiled by Bloomberg going back to 2008. Chinese markets were closed last week for a holiday.

Aussie Gains

The so-called Aussie dollar climbed 0.4 percent to $1.0231 after it touched $1.0149 yesterday, the weakest since July 13. The Shanghai Composite Index of Chinese stocks rose 1.9 percent. China is Australia’s biggest trading partner.

Industrial production in Italy dropped 9.7 percent in August from a year earlier, according to the median estimate of economists in a Bloomberg News survey. That would be the biggest decline since October 2009. Italy is the euro area’s third-largest economy.

Growth in the 17-country euro area will expand 0.2 percent in 2013, down from the projection of 0.7 percent three months ago, the Washington-based IMF said in its World Economic Outlook report today. The region’s economy will contract 0.4 percent this year, the fund forecast.

IMF Outlook

The world economy will grow 3.3 percent this year, the slowest pace since the 2009 recession and compared with the July forecast of 3.5 percent, the IMF said. The risk of a serious global slowdown is “alarmingly high,” the fund said.

“The euro is struggling to strengthen,” said Kengo Suzuki, a currency strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “The economic outlook is not bright in Europe.”

Finance ministers from all 27 nations in the European Union will convene in Luxembourg today. Ministers from the euro bloc yesterday declared the 500 billion-euro ($649 billion) European Stability Mechanism operational, while saying that Spain, the permanent rescue fund’s biggest potential near-term customer, isn’t on the verge of tapping it.

Greece Impresses

Greece, where the European debt crisis began, needs to find spending cuts to maintain access to 240 billion euros in rescue funds and is trying to reach an agreement with its official lenders to release the next payment of 31 billion euros. Luxembourg Prime Minister Jean-Claude Juncker told reporters yesterday he is “impressed” with the Greek government’s performance.

“The key focus will be on Spain and Greece and, while we expect positive progress to be made on both accounts, we do not expect that the event will provide headlines that deliver a major catalyst for the market,” Michael Sneyd, a currency strategist at BNP Paribas SA in London, wrote in an e-mailed note yesterday, referring to the meetings of European financial chiefs. The euro-dollar may not “move substantially on the back of this week’s events and short-term investors are likely to continue to trade the ranges,” he wrote.

The world’s most-accurate foreign-exchange strategists say the dollar will strengthen even as the Federal Reserve debases it, unlike the previous two rounds of economic stimulus, when cash injections weakened the currency.

Stronger Dollar

Fed Chairman Ben S. Bernanke’s $40 billion-a-month of bond purchases will leave a stronger currency in 2013, say 9 of the 10 forecasters with the lowest margins of error in the six quarters ended Sept. 28 as measured by Bloomberg. Wells Fargo & Co. and Westpac Banking Corp., which tied for most-accurate, expect little damage from efforts to stimulate the economy and the so-called fiscal cliff of spending cuts and tax increases scheduled for next year.

While the Dollar Index, which measures the currency against those of six major trading partners, fell 4.6 percent and 3.9 percent in the first two rounds of Fed stimulus that added $2.3 trillion to the banking system, this time will be different, forecasters say. Investors will demand the world’s reserve currency as U.S. growth outpaces its developed counterparts.

“If the U.S. economy keeps outperforming, then it shouldn’t cause the U.S. dollar much damage,” given that most of its trading partners are growing slowly or contracting, said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. Monetary easing is only “a short-term negative for the U.S. dollar.”

Westpac, which matched Wells Fargo with a 3.34 percent margin of error in the Bloomberg analysis, expects the dollar to rally to $1.20 versus the euro by the third quarter of next year, from $1.3045 at the end of last week, and advance to 80 yen from 78.67. The Dollar Index was little changed at 79.506 today.

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