Yen May Extend Gain as Economic Outlook, Oil Spur Safety Demand

June 23 -- The yen and dollar may extend their advance versus the euro after the World Bank said the global recession will be deeper than it predicted in March, encouraging safety demand for the currencies.

The Canadian dollar and Norway’s krone were among the biggest losers against the dollar and yen yesterday as prices of crude oil and copper tumbled. The Japanese and U.S. currencies also strengthened after Iran’s government said at least 17 people were killed during protests over a disputed election.

“The possibility for further correction is there,” said Steven Englander, chief U.S. currency strategist at Barclays Capital in New York. “What you don’t want to do is going short dollar prematurely. It makes sense to wait for the market to sort itself out and for the correction to run its course.” A short position is a bet a currency will drop.

The yen traded at 132.87 per euro at 6:06 a.m. in Tokyo, after climbing 0.9 percent yesterday. The dollar was at $1.3856 per euro, following a 0.5 percent gain. The yen fetched 95.86 per dollar, after rising 0.4 percent.

Japan’s currency advanced 1.9 percent yesterday to 83.21 versus the Canadian dollar and gained 2.6 percent to 14.65 against the krone as the World Bank’s economic outlook and the drop in commodities discouraged carry trades, in which investors borrow in a nation with low interest rates and buy assets where returns are higher.

The Federal Reserve’s target lending rate of zero to 0.25 percent and the Bank of Japan’s 0.1 percent benchmark compare with 3 percent in Australia and 1.25 percent in Norway.

Commodity Currencies

Against the dollar, the Canadian currency lost 1.5 percent to C$1.1523 and the krone weakened 2.2 percent to 6.5472. Crude oil for July delivery fell 3.8 percent to $66.93 a barrel, while copper tumbled to a three-week low. Norway is the world’s fifth- largest oil supplier. Raw materials, such as oil and copper, account for half of Canada’s exports.

The Standard & Poor’s 500 Index lost 2.8 percent yesterday. While the S&P 500 is still up 33 percent since reaching a 12- year low on March 9, the index fell 4.7 percent since June 12.

“In the short term, I won’t be surprised by a dollar rally,” said Venkatraman Anantha-Nageswaran, global chief investment officer in Singapore at Bank Julius Baer & Co., in a Bloomberg Television interview.

In the “medium to long term,” the greenback will depreciate because U.S. domestic demand is so fragile that it requires a weaker currency to stimulate exports to revive the economy, said Anantha-Nageswaran, whose firm has about $252 billion in assets under management.

Fed’s Policy

Investors reduced their positions in foreign exchange before the Fed’s policy statement tomorrow, according to Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.

“In a Fed week, it doesn’t inspire much interest to put on fresh positions,” said Kassel.

The greenback may reverse its advance and weaken on speculation the Fed will craft its statement to keep interest rates down, some analysts said.

“We expect the statement to give a very clear signal over its commitment to maintain the current ultra-loose monetary stance,” Derek Halpenny, London-based European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a note yesterday. “The dollar is vulnerable.”

Dollar Index

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, gained 0.7 percent yesterday to 80.83.

The global economy will contract 2.9 percent this year, the World Bank forecast in a report yesterday, compared with a previous estimate of a 1.7 percent decline.

The dollar also advanced as Iranian police massing in force broke up a demonstration in Tehran over the disputed presidential election just hours after the Revolutionary Guards said they would crush further protest.

Data may show today the global recession is abating. The National Association of Realtors will probably report that existing home sales in the U.S. climbed 3 percent to an annual pace of 4.82 million last month, the highest level since October, according to the median forecast of 70 economists surveyed by Bloomberg News.

In Europe, a contraction in manufacturing and service industries slowed in June, according to the median forecast of 12 economists surveyed by Bloomberg News before Markit Economics releases its report.