Yen Rises as CIT Outlook, Factory Drop Reduce High-Yield Demand

July 16 -- The yen advanced against the euro for the first time in four days after the commercial lender CIT Group Inc. said bailout talks failed and a gauge of U.S. manufacturing fell, reducing demand for higher-yielding assets.

New Zealand’s dollar decreased the most in two weeks against the greenback after Fitch Ratings cut the outlook for the nation’s long-term credit rating. The Canadian dollar dropped from near a one-month high as crude oil prices retreated and U.S. stocks fluctuated.

“CIT put pressure on equities and boosted the yen,” said Jack Spitz, managing director of foreign exchange at National Bank in Toronto. “Volatility in stocks is driving the valuation of currencies.”

The yen appreciated 0.6 percent to 132.13 per euro at 12:06 p.m. in New York, from 132.95 yesterday, when it declined to 133.40, the weakest level since July 7. The dollar traded at $1.4116 per euro, compared with $1.4107. The yen gained 0.7 percent to 93.60 per dollar from 94.23.

New Zealand’s dollar fell as much as 1.5 percent to 63.88 U.S. cents in its biggest intraday drop since July 2 as Fitch said the nation’s deficit is large and a “stronger fiscal adjustment than currently planned” may be needed.

The Canadian dollar slid 0.4 percent to C$1.1173 after crude oil, the nation’s largest export, dropped 0.2 percent to $61.43 a barrel. The currency, known as the loonie, reached C$1.1118 yesterday, the strongest level since June 12, and gained more than 1 percent in each of the past three days as oil prices surged.

Commodity Currencies

The loonie and other commodity-linked currencies including the Australian and New Zealand dollars are among the best performers against the greenback this year as signs the global recession may be ending encourage investors to buy assets related to growth. The loonie gained 9 percent, the Aussie advanced 14 percent and the kiwi, as the New Zealand dollar is known, climbed 11 percent.

Commodity currencies will gain further in the next several months as global growth resumes and investors demand a hedge against inflation and a weaker U.S. dollar, according to Steve Englander, New York-based chief currency strategist at Barclays Capital.

“The world is rebounding probably faster than is still priced into most forecasts,” said Englander in an interview on Bloomberg Television. “There’s still the underlying concern that you want alternatives to the U.S. dollar because of the uncertainty over the policy framework the U.S. has, and the Aussie and kiwi protect you against those shocks.”

Yen Versus Euro

The yen dropped 1.8 percent yesterday versus the euro, the biggest loss since May 28, as the Standard & Poor’s 500 Index rallied 3 percent in its biggest gain in two months. The 60-day correlation between the euro-yen exchange rate and the S&P 500 Index increased to 0.67 from 0.48 at the end of February. A reading of 1 would indicate the two always move in a lockstep.

“Over the last few days, equities rallied and risk sentiment improved,” said John McCarthy, director of currency trading at ING Financial Markets LLC in New York. “It looked as if the market has got ahead of itself. For the time being, equities are calming down, and risk is being taken in. You have to respect the range we’ve been in.”

International demand for long-term U.S. financial assets fell in May as Russia, Japan and Caribbean banking centers trimmed their holdings even as China stepped up its purchases.

International Demand

Total net sales of long-term equities, notes and bonds were $19.8 billion, compared with buying of $11.5 billion the month before, the Treasury said today. China, the biggest foreign holder of U.S. debt, increased its holdings of government notes and bonds by $38 billion to $801.5 billion.

China’s foreign-exchange reserves rose by a record $178 billion in the second quarter to top $2 trillion for the first time, the People’s Bank of China said yesterday.

“China’s reserves allow the U.S. to run a higher fiscal deficit than other nations,” said Bilal Hafeez, the London- based global head of currency strategy at Deutsche Bank AG, the world’s biggest foreign-exchange trader. “Their rhetoric suggests they do want to diversify their reserves, but the data suggests they are doing it in a measured way. There is no dumping dollars.”

The yen rose from near a one-week low against the euro after New York-based CIT said in a statement yesterday “there is no appreciable likelihood of additional government support being provided over the near term.” The company faces bankruptcy if no federal aid emerges, Standard & Poor’s said this week.

Factory Decline

The Federal Reserve Bank of Philadelphia’s gauge of regional manufacturing dropped to minus 7.5 this month from minus 2.2 in June, the bank said today. The median forecast of 53 economists surveyed by Bloomberg News was for a decrease to minus 4.5. Negative numbers signal contraction.

Japan’s currency typically rises during times of financial turmoil because its trade surplus means the nation doesn’t have to rely on overseas lenders.

The yen earlier pared its gains as profit at JPMorgan Chase & Co. rose for the first time since 2007 and a report showed U.S. first-time unemployment claims fell last week to the lowest level since January.

“Right now, data is inconsistent,” said Sophia Drossos, chief currency strategist at Morgan Stanley in New York. “Our six-month view is that the rebound in the global economy is taking shape. The key consequence of a global recovery is a weaker dollar.”