Japanese yen gets stronger

The yen rose for a third day against the euro on speculation restrictions on Chinese production will stifle an economic recovery, sparking demand for the relative safety of the Japanese currency.

The yen gained versus all of its 16 major counterparts as Asian shares declined on the proposed production curbs and before reports estimated to show a faster contraction in the U.S. economy contracted and higher unemployment in Japan. The pound dropped to the weakest level in more than a month against the yen before a U.K. report today that economists said will show British home prices increased at a slower pace this month.

“Uncertainties about China’s policy action, aimed at tackling credit expansion, will continue to be a key driving force of the market,” said Toshiya Yamauchi, a manager of the foreign-exchange margin-trading department at Ueda Harlow Ltd. in Tokyo. “Should the Chinese stock market struggle, the safe- haven currencies may strengthen.”

The yen advanced to 133.44 per euro as of 1:24 p.m. in Tokyo from 134.36 in New York yesterday. Japan’s currency climbed to 93.68 per dollar from 94.26. The dollar traded at $1.4244 versus the euro from $1.4255.

The pound dropped to 151.87 yen from 153.17 after falling to 151.73, the lowest since July 14. The U.K. currency declined to $1.6223 from $1.6249 yesterday when it touched $1.6160, the weakest since July 13. The Australian dollar fell to 82.74 U.S. cents from 82.84 cents as crude oil, the nation’s fourth-most valuable export, slid for a third day.

‘Undermine a Recovery’

China’s cabinet said yesterday it’s studying restrictions on overcapacity in industries including steel and cement as policy makers seek to rein in investment growth fueled by a record credit expansion this year.

“China is a key engine for Asia’s economies, so any curbs on investment would likely undermine a recovery in the region,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “Risk aversion will probably increase, leading to buying of the yen and the dollar.”

The Chinese government will also increase “guidance” over parts of the coal, glass and power industries, the State Council said on its Web site yesterday. Controls on stock and bond sales by companies in targeted sectors will be strengthened, it said.

The nation’s benchmark stock index has dropped some 15 percent from this year’s high set on Aug. 4 on concern banks will tighten credit after extending a record $1.1 trillion of loans in the first six months.

Chinese Stocks

The Shanghai Composite Index fell 0.4 percent today. The Nikkei 225 Stock Average declined 1.8 percent and the MSCI Asia Pacific Index of regional shares lost 0.9 percent.

The yen also strengthened as a Bloomberg News survey of economists showed the unemployment rate in Japan rose last month, damping risk appetite. The jobless figure is forecast to climb to 5.5 percent from 5.4 percent.

Consumer prices excluding fresh food dropped an unprecedented 2.2 percent in July, according to a Bloomberg News survey. Both reports are due tomorrow.

Adding to concern the global recovery will be slow, the U.S. government’s revised figures for second-quarter gross domestic product, due today, will show the economy shrank at a 1.5 percent annual rate, compared with the preliminary reading of a 1 percent contraction, according to another Bloomberg survey.

‘Little Incentive’

Gains in the dollar were limited after the London interbank offered rate, or Libor, for three-month dollar loans dropped below that for similar-maturity yen loans for the first time in 16 years, according to BNP Paribas SA, France’s largest bank.

“At these levels there is little incentive to borrow in yen to fund investments” in higher-yielding assets, analysts led by Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas, wrote in a research note yesterday. “The dollar-yen is likely to remain pressured.”

Libor for three-month dollar loans fell to 0.37188 percent yesterday from 0.38000 percent on Aug. 25. Libor for three-month yen loans declined to 0.38813 percent yesterday from 0.38875 percent on Aug. 25.

The Dollar Index, which the ICE uses to track the dollar against currencies of six major U.S. trading partners including the euro and the yen, was little changed at 78.612 from 78.636.

Regional Currency

Japan’s opposition leader Yukio Hatoyama wrote in the New York Times that his nation should work with other Asian countries to create a single regional currency and bolster alliances to make it possible.

Asia should “aspire to move toward regional currency integration,” wrote Hatoyama, who polls indicate will become Japan’s prime minister after a national election on Aug. 30. “We must spare no effort to build the permanent security frameworks essential to underpinning” a single currency that “will likely take more than 10 years” to establish.

The pound declined for a seventh day against the euro, the longest run since January, on concern an economic recovery in the U.K. will lag behind its major counterparts.

The average cost of a British home climbed 0.5 percent in August following a 1.3 percent increase in July, according to a Bloomberg survey of economists before the Nationwide Building Society releases the data today.

“The recovery in U.K. house prices may be stalling,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “It’s not good for the economy and it’s negative for the pound.”

The Bank of England has cut its benchmark interest rate to 0.5 percent, allocated 175 billion pounds ($284 billion) to buy bonds and is raising 220 billion pounds of debt through March 2010 to fund stimulus packages and bank bailouts.

Source: Bloomberg

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