Yen Falls for Third Day as Stocks Rise Before U.S. Factory Output Report

July 15 The yen and the dollar weakened against the euro before a U.S. report today that economists said will show the contraction in industrial production slowed, damping demand for safer assets.
Asian currencies strengthened, led by South Korea’s won and Indonesia’s rupiah, as regional stocks gained and foreign- exchange and equity-market volatility declined, spurring investors to buy higher-yielding assets. The yen declined against 13 of the 16 major currencies after the Bank of Japan lowered its forecasts for the economy, reducing the appeal of the currency.
“U.S. data may spur hopes for an economic recovery,” said Shinichi Hayashi, a Tokyo-based foreign-exchange dealer at Shinkin Central Bank, the central institution for Japan’s financial co-operatives. “Rising equities will certainly lead to risk taking. The bias is for selling the yen.”
The yen declined to 131.37 per euro as of 7:50 a.m. in London from 130.62 yesterday in New York, after earlier dropping to 131.40, the lowest since July 8. The dollar weakened to $1.4060 per euro from $1.3967. The yen was at 93.42 versus the dollar from 93.50.
The won rose for second day, climbing 1.2 percent to 1,278.35 per dollar, the rupiah advanced 0.8 percent to 10,130 and Malaysia’s ringgit climbed 0.5 percent to 3.560.
Asian Currencies
Asian currencies gained after a JPMorgan Chase & Co. gauge showed implied volatility on options for major exchange rates fell to 13.69 percent yesterday from 14.05 percent the previous day. Lower volatility indicates a lesser risk of currency fluctuations that may erode profit on riskier investments.
The VIX Index, a measure of stock-market volatility known as Wall Street’s fear gauge, fell as low as 24.99 yesterday, the least since July 1.
The MSCI Asia Pacific Index of regional shares climbed 0.9 percent after the Standard & Poor’s 500 Index advanced 0.5 percent yesterday, when a U.S. report showed retail sales increased last month more than economists expected. U.S. factory production fell 0.6 percent in June after a 1.1 percent drop in May, according to a Bloomberg News survey of economists before the Federal Reserve report today.
The yen fell for a third day against the euro after the Bank of Japan forecast the economy will shrink 3.4 percent in the year ending March 2010, more than the 3.1 percent predicted in April. That would outstrip last fiscal year’s 3.3 percent contraction as the worst in the postwar era. GDP will increase 1 percent in the following fiscal year, less than the 1.2 percent predicted three months ago.
Intel, Goldman
The yen and the dollar also weakened after Intel Corp.’s revenue forecast beat estimates yesterday and Goldman Sachs Group Inc. reported higher-than-expected earnings, damping demand for safer assets.
Intel predicted sales would reach as much as $8.9 billion in the current quarter, surpassing the $7.86 billion estimated by analysts surveyed by Bloomberg. Goldman Sachs said net income in the three months ended June 26 was $3.44 billion, or $4.93 a share, the bank said. That surpassed the $3.65 per-share average estimate of analysts.
“There is a sense that optimism-driven trading is re- emerging,” said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s third-largest banking group. “The forecast-beating results from Goldman Sachs and Intel suggest the yen will weaken and stocks will advance.”
JPMorgan and International Business Machines Corp. are among other companies in the Standard & Poor’s 500 Index due to report results this week.
‘Less Negative’
Losses in the dollar were tempered after Tsutomu Okubo, who is a director of the upper house’s financial committee and a member of the opposition Democratic Party of Japan, said in an interview published today that enhancing trust in the U.S. currency and Treasuries is beneficial for Japan.
“The comments at least show DPJ politicians are not strongly agreed to pressure the U.S., and thus are less negative for the dollar in the near term,” Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo, wrote in an e-mail today.
Masaharu Nakagawa, the shadow finance minister in the DPJ, said on July 9 that Japan should consider diversifying its foreign reserves away from the dollar.
China said today its foreign-exchange reserves topped $2 trillion for the first time, highlighting the difficulty the nation faces in finding places to invest the world’s largest holdings. The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People’s Bank of China said on its Web site. That compares with a $7.7 billion gain in the previous three months.
BOJ Rates
The Bank of Japan kept its target interest rate at 0.1 percent at the end of a two-day policy meeting today, as forecast by all the 25 economists surveyed by blognews.The central bank extended its emergency-credit programs to Dec. 31 from Sept. 30, it said in a statement.
“With the interest-rate differentials virtually non- existent among Japan, the U.S. and Europe, the market may pay less attention to the advantage or disadvantage of yields,” said Shigeki Muramatsu, deputy general manager of securities investment section at Mizuho Trust & Banking Co. “Falling rate differentials may lock the yen in a relatively tight trading range against major pairs.”