Dollar Rises Most Versus Yen Since February on U.S. Economy

June 6 (Bloomberg) -- The dollar advanced the most against the yen in more than three months and rose versus the euro as economic data showed evidence the U.S. recession is easing, boosting demand for the nation’s assets.

The greenback climbed this week as a government report indicated slower deterioration of the labor market, supporting bets dollar-denominated assets will gain as the U.S. leads the global economy out of its slump. The yen fell versus the Australian and New Zealand dollars on speculation investors will increase purchases of higher-yielding assets.

“There’s no denying the dollar’s had a strong move in a week of decent data,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “It’s a tantalizing possibility. If so, that would be good news because that’s the way we were all raised to understand the relationship between yields, currencies and data.”

The dollar gained 3.5 percent to 98.64 yen this week, from 95.34 on May 29, after touching 98.82, the highest level since May 8. It was the biggest weekly rally since the five days ended Feb. 27, when the greenback increased 4.5 percent. The dollar advanced 1.3 percent to $1.3968 versus the euro from $1.4158. The euro appreciated 2.1 percent to 137.81 yen from 134.96 in a third week of gains.

The pound fell 1.3 percent this week to $1.5981 as Prime Minister Gordon Brown rearranged his cabinet amid calls for his resignation. Pensions Secretary James Purnell stepped down on June 4 and urged Brown to follow. Defense Minister John Hutton quit yesterday. Sterling touched $1.6662 on June 3, the highest level since Oct. 30.

Sweden’s Krona

Sweden’s krona dropped against all of the 16 most-traded currencies tracked by Bloomberg on bets Latvia will devalue its currency, the lats. Swedish banks have about $75 billion in loans to the Baltic states, according to the Bank for International Settlements in Basel, Switzerland.

“It’s a question of time when Latvia will be forced to depeg or repeg against the euro,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co., said in a Bloomberg Television interview. “Eastern Europe has problems. It’s going to be dragging on western European currencies.”

The krona dropped 2 percent this week to 10.8992 versus the euro. Latvia’s central bank buys and sells foreign-currency reserves to prevent the lats from fluctuating more than 1 percent on either side of 0.702804 per euro.

The trade-weighted Dollar Index gained 1.8 percent this week to 80.674, recovering from May’s 6.4 percent decline as traders added to bets that demand for dollar-denominated assets will rise in an economic recovery.

Economy and Dollar

“We may be moving to a situation where stronger economic numbers are actually good for the dollar,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “It may be just a hint that the pessimism on the dollar has been overdone.”

The dollar fell on June 3 to its lowest level in 2009 against the euro on concern the quadrupling of the U.S. government’s budget deficit this year would sap demand for Treasuries among foreign investors and central banks.

The Australian and New Zealand dollars rose against the yen on four out of the five trading days this week on bets U.S. economic data will spur carry trades, where investors borrow in a country with low interest rates to buy where returns are higher. The target lending rate of 0.1 percent in Japan compares with Australia’s 3 percent and 2.5 percent in New Zealand.

‘A Green Light’

“It’s a green light for some more risk-seeking trades out there in the currency market,” said Samarjit Shankar, a director of global strategy in Boston at Bank of New York Mellon Corp., which administers more than $20 trillion in assets. “There’s more momentum to the view that the worst of the cycle might be behind us.”

U.S. job cuts slowed to 345,000 in May, fewer than the revised decrease of 504,000 in the previous month, the Labor Department reported yesterday in Washington. The median forecast of 76 economists surveyed by Bloomberg News was for a 520,000 reduction. The unemployment rate rose to 9.4 percent.

Factory orders rose in April for the second time in three months, and service industries contracted at a slower pace in May, other reports showed this week.

Japan’s currency fell 1.2 percent this week to 61.79 against the New Zealand dollar and 2.5 percent to 78.25 versus Australia’s currency.

The Standard & Poor’s 500 Index climbed 2.3 percent this week, and the Dow Jones Stoxx 600 Index of European shares advanced 1.2 percent.

Canadian Dollar

The Canadian dollar slipped 2.5 percent to C$1.1190 versus the greenback as a government report showed the economy lost jobs for a sixth time in seven months, pushing unemployment up to 8.4 percent.

The dollar also gained against the yen on speculation the Federal Reserve will raise interest rates later this year, reducing the advantage of borrowing in the U.S. to fund purchases elsewhere.

Traders added to bets the central bank will increase its target rate for overnight loans between banks by its November policy meeting, according to futures traded on the Chicago Board of Trade. The contracts show a 66 percent chance of a rate increase by then, compared with 24 percent odds a week ago.

European Central Bank Governing Council member John Hurley said yesterday in an interview broadcast by Ireland’s RTE radio that the central bank’s main interest rate of 1 percent is “not necessarily” the lowest level.