Yen Touches 5-Month High Against Euro on Ukraine, Gaza

The yen touched the strongest level since February against the euro as investors sought haven assets after a Malaysia Airlines plane was shot down over Ukraine and amid escalating tension in the Gaza Strip.

Japan’s currency headed for a second weekly advance versus the euro as shares dropped across Asia. Malaysia’s ringgit and India’s rupee declined, while the Russian ruble reached a two-month low. A gauge of the greenback climbed to the highest in four weeks before a report today that may show a measure of U.S. consumer confidence climbed this month, supporting the case for an interest-rate increase from the Federal Reserve.

“The knee-jerk reaction has been buying of the yen and some general risk aversion trades,” said Thomas Averill, a managing director in Sydney at Rochford Capital, a currency and rates risk-management company. “Risk is building that the Federal Reserve may have to raise rates relatively early in 2015, and that’s causing a general bid for the U.S. dollar. We’ve got some kind of risk-aversion attraction to the U.S. dollar as well.”

The yen fell 0.1 percent to 137.01 per euro at 7:18 a.m. in London from yesterday after appreciating to 136.71, the strongest since Feb. 5. It has gained 0.7 percent this week. Japan’s currency slid 0.1 percent to 101.31 per dollar. The euro was little changed at $1.3522 per dollar.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major counterparts was little changed at 1,010.17, after reaching 1,010.92, the highest since June 20.

The MSCI Asia Pacific Index dropped 0.4 percent. The Standard & Poor’s 500 Index of U.S. equities declined 1.2 percent yesterday, the biggest one-day slide since April 10.

Shot Down

A Boeing Co. 777 jet operated by Malaysian Airline System Bhd. was shot down over eastern Ukraine, killing all 298 people on board, in an attack that the government in Kiev blamed on pro-Russian rebels. The separatists denied the accusation.

The incident comes just days after the U.S. said pro-Russian rebels are getting weapons from Russia and tightened sanctions against the country. After Russia annexed Crimea earlier this year, the U.S. accused the country of trying to foment unrest in Ukraine’s eastern regions, a claim that President Vladimir Putin rejects.

The ruble lost 0.1 percent to 35.21 per dollar after reaching 35.29, the weakest level since May 12.

Israel sent ground forces into the Gaza Strip in a military offensive aimed at stopping the barrage of missiles fired by Hamas and other Palestinian militants after a short-lived cease-fire collapsed.

Safety Demand

The U.S. currency also attracted demand from investors looking for safer assets, according to Nagayuki Yamagishi, a senior analyst in Tokyo at Money Square Japan Inc., a foreign-exchange broker. “The market has not fully priced in the risks about how this plane crash may evolve,” he said.

The yen and the dollar both rose 0.5 percent in the past week, the best performers among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro lost 0.2 percent.

The Malaysian ringgit dropped 0.3 percent to 3.1864 per dollar.

Implied volatility of three-month options of Group of Seven currencies was at 5.46 percent today after dropping to a record of 5.11 percent on July 3, according to the JPMorgan G7 Volatility Index. A decrease means investments in currencies with higher benchmark lending rates are more attractive as the risk of price swings erasing profits is lower.

Nervous Market

Events in Ukraine “come at a time when global financial markets are already nervous that the extended period of low volatility and strong returns may be nearing its end,” ANZ Bank New Zealand Ltd. economist Sharon Zollner and senior currency strategist Sam Tuck, wrote in a note to clients today. Market expectations for a normalization of monetary policy in the U.S. are evolving from “someday” to “which day,” they wrote.

In the U.S., the Thomson Reuters/University of Michigan’s preliminary sentiment index probably rose to 83 in July from 82.5 the previous month, according to the median estimate of economists surveyed by Bloomberg News before the report today.

The U.S. central bank may have to raise rates more quickly than planned as unemployment falls and inflation quickens, St. Louis Fed James Bullard said in a speech yesterday in Owensboro, Kentucky. Fed Chair Janet Yellen told lawmakers this week borrowing costs may rise sooner than markets expect should the labor market continue to improve faster than anticipated.

The Fed has kept the benchmark interest rate at a record zero to 0.25 percent since December 2008. Traders are betting there’s about a 70 percent chance policy makers will raise the rate by September, fed funds futures data compiled by Bloomberg show.

(Corrects to say yen fell in fourth paragraph.)
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