EU Finance Ministers Say Any Chance of Recovery Is In Peril

Yen Advances as EU Finance Ministers Signal Risks to Recovery
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By Ron Harui and Yasuhiko Seki

July 7 (Bloomberg) -- The yen rose against the euro, South African rand and Australian dollar after European finance ministers said risks to the recovery remain, spurring demand for the relative safety of Japan’s currency.

The yen strengthened against all 16 major currencies after Luxembourg Finance Minister Jean-Claude Juncker said at a meeting of euro-area counterparts that “we are still in the middle of the crisis.” The euro fell for a fourth day against the yen on speculation overseas investors, including some in Japan, will bring home income from redemption and coupon payments on 37 billion euros ($51.7 billion) in European bonds due this week, according to Nomura International Plc.

“It’s natural that European policy makers aren’t confident in their economic recovery, as the region is nowhere near that stage yet,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The trend to avoid risk is likely to persist. It’s a negative for the euro and a positive for the yen.”

The yen rose to 133.08 against the euro as of 11:08 a.m. in Tokyo from 133.34 in New York yesterday. It gained 0.5 percent to 11.9540 per rand, and advanced 0.3 percent to 75.83 versus the Australian dollar. Japan’s currency traded at 95.34 per dollar from 95.35. The euro was at $1.3957 from $1.3984.

The yen may advance to 132.50 per euro and 94.60 versus the dollar today, Ishikawa said. The yen typically strengthens in times of financial turmoil as Japan’s trade surplus means the nation does not have to rely on overseas lenders.

Forecast Cut

Juncker’s comments in Brussels yesterday came after the Organization for Economic Cooperation and Development said last month signs of a recovery in the 16-nation euro area were not that clear. The OECD cut its 2009 forecast for the region’s economy to a contraction of 4.8 percent compared with 4.1 percent in March, and said the ECB should lower its benchmark interest rate from 1 percent.

The Eonia overnight index average, the market rate that European banks charge each other, declined to 0.332 percent yesterday from 0.381 a week ago, below the ECB’s benchmark.

“Not only lingering worries about the prospect of the eurozone economy are hurting sentiment toward the euro, falling yield advantage, as evident by declines in Eonia also weakens the appetite for the single currency,” said Akira Takei, a fund manager in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank.

‘Remain Weak’

Euro-area economic activity this year “is likely to remain weak, but should decline less strongly than was the case in the first quarter,” European Central Bank President Jean-Claude Trichet said July 2, when policy makers left the benchmark rate at a record low.

The euro pared losses on speculation Group of Eight leaders will call into question the dollar’s status as the international reserve currency when they meet in Italy this week.

“We need to be alert to a possibility of G-8 actually making this issue an official agenda item,” said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp, a unit of Japan’s third-largest banking group. “This will keep a cap on the dollar.”

Russia said the world economy is overly reliant on the dollar and called for changes in how $6.5 trillion in currency reserves are managed.

“The dollar system or the system based on the dollar and euro have shown that they are flawed,” Russian President Dmitry Medvedev said in an interview with the Italian newspaper Corriere della Sera, repeating his proposal for a new international reserve currency.

Volatility Rises

The yen also rose after Asian stocks fell and the VIX Index climbed. The MSCI Asia-Pacific Index of regional shares dropped 0.2 percent today, a fifth straight decline. The VIX Index, a measure of market volatility known as Wall Street’s fear gauge, rose to as much as 30.60 yesterday, the highest since June 23.

“Equity markets are continuing the decline started at the end of last week, while the VIX Index is also starting to rebound,” analysts led by Hans-Guenter Redeker, London-based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a client note yesterday. “The yen is the major beneficiary of the current shift in market sentiment.”

BNP Paribas forecasts the yen will strengthen to 126 per euro and to 93 per dollar by the end of September, compared with previous predictions of 138 and 96, respectively.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.
Last Updated: July 6, 2009 22:36 EDT