Yen Falls, Pound Advances as Banks Rally, Greenspan Optimistic

Aug. 3 -- The yen declined and the pound rose after HSBC Holdings Plc posted an unexpected profit and former Federal Reserve Chairman Alan Greenspan said the most severe recession in at least five decades may be ending.

Japan’s currency fell against all its 16 most-traded counterparts on increased demand for higher-yielding assets as HSBC reported its results. U.S. manufacturing shrank in July at the slowest pace in almost year, a report from the Institute for Supply Management is forecast to show today.

“HSBC’s results were good compared to expectations, so that’s proven supportive to the pound and is dragging on the yen,” said Geoffrey Yu, a foreign-exchange strategist in London at UBS AG, which Euromoney Institutional Investor Plc ranks as the world’s second-biggest currency trader “Clients are skeptical about this rally but can’t afford not to be in it.”

The yen weakened 1 percent to 159.76 per pound at 7:12 a.m. in New York, from 158.23 on July 31. Japan’s currency dropped 0.5 percent to 135.70 per euro and slid 0.3 percent to 94.97 per dollar. The U.S. currency declined 0.2 percent to $1.4290 per euro, compared with $1.4257.

Economic growth may resume at a rate faster than most economists foresee, Greenspan said in an interview yesterday on ABC’s “This Week” program, predicting 2.5 percent in the current quarter.

The MSCI World Index of shares rose 1 percent, while Europe’s Dow Jones Stoxx 600 Index gained 1.7 percent.

The Institute for Supply Management’s U.S. factory gauge increased last month to 46.5, from 44.8 in June, according to the median forecast of 62 economists surveyed by Bloomberg. Readings less than 50 signal contraction. The report from the Tempe, Arizona-based institute is due at 10 a.m. New York time.

Pound Versus Euro

The pound rose for a sixth day against the euro, gaining to 84.89 pence as the U.K.’s Chartered Institute of Purchasing and Supply and Markit Economics said today manufacturing expanded in July for the first time in more than a year.

A gauge based on a survey of factories climbed to 50.8 from a revised 47.4 in June. The median forecast of 25 economists surveyed by Bloomberg News was for a reading of 47.8. Readings above 50 show expansion.

The FTSE 350 Banks Index rose 5.3 percent, the most since May 5, on HSBC’s results and as Barclays, the U.K.’s second- largest lender, said first-half earnings rose 10 percent and profit from investment banking almost doubled.

‘Economy Is Stabilizing’

“There are signs that the economy is stabilizing, and the market is right to feel reassured,” said Jane Foley, research director in London at Forex.com, an online currency trader.

The Dollar Index, which the ICE uses to track the U.S. currency against those of six major U.S. trading partners including the euro, reached 77.98, the lowest level since Dec. 18, on reduced demand for safety.

The U.S. economy shrank at a 1 percent annual pace in the second quarter, the Commerce Department reported July 31, better than economists forecast. Stabilization of housing markets and consumer spending, a lessening of financial turmoil and increased government spending all suggest the longest recession since the 1930s may be close to ending.

Currencies sensitive to raw material prices, including the Australian dollar, advanced as Nouriel Roubini, the New York University economist who predicted the financial crisis, told a mining conference in Australia that commodities may extend their rally in 2010 as the global recession abates.

Chinese Factories

China’s manufacturing expanded in July, a report showed today. The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 52.8, the highest level in a year, from 51.8 in June, CLSA Asia-Pacific Markets said. A government-backed index, released Aug. 1, also showed an expansion.

Futures traders trimmed bets the euro will gain against the dollar last week, figures from the Washington-based Commodity Futures Trading Commission showed. Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of July 28.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 20,287 on July 28, compared with net longs of 34,772 a week earlier.

Foreign-exchange traders are losing faith that Mexican President Felipe Calderon will push through the tax increases needed to rein in the budget deficit and stem a rout that has made the peso the worst-performing major currency against the dollar in the past year.

Options traders are more bearish on the peso over the next six months than 12 of the other 16 most-traded currencies against the U.S. dollar tracked by Bloomberg, according to derivatives known as risk-reversals. Morgan Stanley strategists say Mexico’s economy is headed for “unsustainable” deficits as oil output declines while RBC Capital Markets advises investors to sell the currency.

The peso was little changed at 13.1880 versus the dollar today after gaining 3.7 percent this year.