Yen May Extend Gains as Risk Appetite Drops on U.S. Services

Aug. 6 -- The yen may rise further as demand for higher-yielding currencies fell after reports showed U.S. service industries contracted last month at a faster pace and companies eliminated more jobs than economists forecast.

The pound increased yesterday to its highest level against the dollar in more than nine months as U.K. services industries grew in July by the most in 1 1/2 years. The Bank of England and the European Central Bank will probably keep their benchmark lending rates at record lows at their policy meetings today, according to economists surveyed by Bloomberg News.

“The desire for risk is so high that it just needs a pause,” said John Taylor, chief executive officer in New York at FX Concepts LLC, in an interview on Bloomberg Television. “People looking for jobs may find it difficult for years.” Taylor’s firm has $9 billion under management.

The yen traded at 136.77 against the euro at 6:04 a.m. in Tokyo, after rising 0.3 percent yesterday. Japan’s currency was at 94.93 per dollar, following a 0.3 percent increase yesterday. The dollar was little changed at $1.4410 per euro after touching $1.4447, the weakest level since Dec. 18.

Japan’s currency increased 1.1 percent to 11.99 against the South African rand and gained 0.6 percent to 13.30 versus the Swedish krona on bets yesterday’s U.S. economic reports will discourage Japanese investors from buying higher-yielding assets overseas. Japan’s 0.1 percent target lending rate compares with 7.5 percent in South Africa and 0.25 percent in Sweden.

U.S. Stocks

The Standard & Poor’s 500 Index fluctuated between a gain and a loss after a four-day rally that pushed the gauge of U.S. stocks above 1,000 on Aug. 3 for the first time since November. The dollar touched the weakest level this year versus the euro as U.S. stocks trimmed losses.

Mexico’s peso strengthened yesterday beyond 13 versus the dollar for the first time since June 1 after Moody’s Investors Service affirmed the government’s bond ratings and stable outlook, damping speculation the nation will suffer its first downgrade since 1995. Moody’s kept Mexico’s foreign debt rating at Baa1, the third-lowest investment-grade level, saying the government’s commitment to fiscal discipline offset concern growth is weak.

Morgan Stanley recommended yesterday that its clients add to their bets that the peso will advance versus the dollar, saying the Moody’s affirmation “adds to the positive momentum.” Morgan Stanley expects a “longer-term” move to 12 per dollar, strategists wrote in a research note. The peso gained as much as 1 percent to 12.9981.

Stronger Pound

The pound climbed as much as 0.6 percent to $1.7043, the highest level since Oct. 21, as a report showed U.K. services industries grew last month by the most in 1 1/2 years.

An index of services rose to 53.2 last month from 51.6 in June, Markit said yesterday in London. Factory output climbed 0.4 percent in June, the U.K.’s statistics office said.

Sterling gained 16 percent versus the dollar and 13 percent against the euro this year.

Eight of 12 primary dealers surveyed by Bloomberg said the U.K. central bank will end a five-month program of bond purchases after announcing a pause at its policy meeting today. Four -- BNP Paribas SA, RBC Capital Markets, Merrill Lynch and UBS AG -- predict policy makers will increase purchases after the bank spent 125 billion pounds ($212 billion) of the 150 billion pounds authorized by the Treasury in March.

The Bank of England will keep its main rate at 0.5 percent, while the ECB will probably maintain its benchmark at 1 percent, according to the median forecast of economists in separate Bloomberg News surveys.

U.S. Services

The Institute for Supply Management’s index of U.S. non- manufacturing businesses, which make up almost 90 percent of the economy, fell to 46.4 in July from 47 in the previous month, according to the Tempe, Arizona-based group. Fifty is the dividing line between expansion and contraction.

U.S. companies cut an estimated 371,000 workers from payrolls last month after a revised reduction of 463,000 in June, ADP Employer Services reported yesterday. The median forecast of 30 economists in a Bloomberg News survey was for a drop of 350,000.

The Labor Department’s data on U.S. initial jobless claims for last week are due today, and its July payroll report will come tomorrow.

“It appears investors are positioning for a pullback in risk appetite,” said Samarjit Shankar, director of strategy for the global markets group in Boston at Bank of New York Mellon Corp., the world’s largest custodial bank. “We haven’t seen concrete signs of a sustainable recovery.”