Dollar, Yen Weaken as Optimism Over Recovery Spurs Yield Demand

June 11 -- The dollar and the yen declined against the euro as speculation the global recession is easing prompted investors to buy higher-yielding assets.

The New Zealand and Australian dollars were the biggest gainers of the 16 most-active currencies after New Zealand’s central bank left interest rates unchanged for the first time in a year and Australia reported a smaller-than-expected drop in jobs for last month. The euro rose against the dollar on speculation a European Central Bank official may indicate a reluctance to cut rates, maintaining the currency’s appeal.

“Capital flight from the dollar and the yen continues,” said Minoru Shioiri, a senior currency dealer in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest banking group. “The receding worries about the credit crunch and the recession also weaken the need for holding onto safe-haven currencies.”

The dollar dropped to $1.4030 per euro as of 12:54 p.m. in Tokyo from $1.3984 yesterday in New York. The U.S. currency also weakened to 97.90 yen from 98.12 yen. Japan’s currency dropped to 137.36 per euro from 137.21.

New Zealand’s dollar climbed 1.6 percent to 63.59 U.S. cents and advanced 1.3 percent to 62.26 yen. Asian stocks rose, with the Nikkei 225 Stock Average Index climbing above 10,000 for the first time since October.

Net Buyers

Japanese investors bought 476.7 billion yen ($4.9 billion) more overseas bonds than they sold in the week ended June 6, according to data released today by the Ministry of Finance in Tokyo. They were also net purchasers of 148.6 billion yen in foreign equities.

“Investors in Japan are selling the yen to buy some higher-yielding currencies,” said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. “Carry trades will last for a while.” Carry trades involve buying higher-yielding assets funded with loans made in countries with lower borrowing costs, such as Japan.

The Federal Reserve said yesterday the U.S. recession may be slowing in almost half of its regions and the outlook at some companies is improving. Five of 12 Fed districts “noted that the downward trend is showing signs of moderating,” the Fed said in its Beige Book business survey.

‘Begin Growing’

The New Zealand dollar strengthened as the central bank said the country’s worst recession in at least three decades may be nearing the end.

“We expect the New Zealand economy to begin growing again toward the end of this year, but the recovery is likely to be slow and fragile,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today after leaving the official cash rate unchanged. “It’s likely to be some time before monetary policy support can be withdrawn.”

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets.

U.S. retail sales probably increased in May for the first time in three months, according to the median forecast of 76 economists surveyed by Bloomberg News. The report from the Commerce Department is due today.

The Australian dollar reached 79.61 yen today, the highest level since Oct. 6, after the number of people employed in the nation fell 1,700 from April, Australia’s statistics bureau said in Sydney. The median estimate of 20 analysts surveyed by Bloomberg News was for a 30,000 decline.

Bets on Higher Rates

Urban fixed-asset investment in China rose 32.9 percent in May in response to the government’s 4 trillion yuan ($585 billion) stimulus package, the country’s statistics bureau said today. The median forecast was for a rise of 31 percent, according to a Bloomberg News survey of economists.

Signs of a pickup in the global economy prompted investors to increase bets that Australia’s benchmark interest rate will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.

The euro advanced against the dollar on speculation European Central Bank Executive Board member Juergen Stark may reiterate a hawkish stance on the prospect of interest rates in the 16-nation zone when he speaks today.

Rate Advantage

The current interest-rate level is “appropriate,” Stark said on June 8. “The ECB is well prepared to take appropriate action and also to exit from its non-standard monetary policy and liquidity management measures in a credible manner once the macroeconomic environment improves,” he said.

“The mere fact that the euro-zone still has a rate advantage over major counterparts is still offering a good reason for investors to buy into the euro,” said Masahide Tanaka, senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank.

European Central Bank Governing Council member Axel Weber said yesterday central banks may have to raise interest rates before inflation risks materialize to prevent future crises. The comments don’t refer to current ECB policy, Weber said.

The ECB has lagged the Federal Reserve and the Bank of England, which have cut their key rates close to zero and started buying government and corporate bonds to pump money into their economies. At 1 percent, the ECB’s benchmark rate is the highest among Group of Seven countries.

Reserve Reshuffling

The Dollar Index, used by the ICE to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, dropped 0.4 percent to 80.003. The Russian central bank’s first deputy chairman, Alexei Ulyukayev, said yesterday in Moscow that the country may switch some of its reserves from Treasuries to IMF bonds.

The dollar fell 6.6 percent versus the euro in May, the biggest monthly drop this year, on speculation the quadrupling of the U.S. budget deficit and the Fed’s increase of the money supply will undermine the greenback.