Yen Gains to 8-Week High After Fed Projects a Deeper Recession

(Bloomberg) -- The yen rose to an eight-week high against the dollar after the U.S. Federal Reserve projected a deeper recession, boosting demand for the Japanese currency as a refuge from the global slump.

The dollar fell for a third day versus the yen after minutes of the latest Fed meeting released yesterday showed policy makers may buy more assets to spur a revival in the world’s largest economy. The euro approached a four-month high against the dollar before a European manufacturing and services report that may back the case for the region’s central bank to keep interest rates unchanged. South Korea’s won rose toward a seven-month high against the dollar.

“The Fed’s downgrade of growth forecasts, occurring amid an optimistic mood, shocked markets,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-largest bank. “This is leading to buying of the yen.”

The yen strengthened to 94.47 per dollar as of 11:44 a.m. in Tokyo from 94.88 yesterday in New York after climbing to 94.29, the highest level since March 20. Japan’s currency advanced to 130.34 per euro from 130.77. The euro rose to $1.3801 from $1.3780 yesterday, when it reached $1.3830, the strongest level since Jan. 5.

The dollar declined to $1.5817 versus the British pound, the weakest since Nov. 10, before trading at $1.5797 from $1.5755. South Korea’s won strengthened 0.2 percent to 1,248.60 per dollar, after touching 1,225.97 on May 11, the strongest since Oct. 15.

Dollar Index

The Dollar Index fell for a fourth day after minutes of the Fed’s April 28-29 meeting released yesterday showed some policy makers said “a further increase” in the total amount of asset purchases may be needed to speed a U.S. economic recovery.

Fed governors and district-bank presidents also cut their projections for economic growth in quarterly forecasts submitted at the meeting, the minutes showed. They foresaw a deeper contraction in 2009 and a weaker recovery next year, with the unemployment rate projected to remain at 9 percent or higher.

“The Fed may expand its asset-purchase program, which would increase the supply of greenbacks in the market,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank. “This could undermine the value of the dollar and spur investors in the U.S. to put their funds overseas.”

The Dollar Index, used by the ICE to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, declined to 80.931 after yesterday dropping to 80.91, the lowest level since Dec. 31.

Record Loss

The dollar dropped a record 3.4 percent versus the euro on March 18, when the Fed announced plans to buy up to $300 billion in U.S. government debt to keep interest rates low and stimulate the economy, a measure known as quantitative easing.

The yen advanced versus all 16 of the most-traded currencies as a survey published by Barclays Capital today showed Japan’s money managers judge the market’s outlook for the U.S. economy to be too optimistic.

About 82 percent of 55 Japanese institutional investors who responded to the poll this week described the market’s outlook as either “extremely” or “somewhat” optimistic, while only 13 percent called it “appropriate.”

“The majority of Japanese investors believe the outlook for the economy currently factored into the U.S. markets is overly optimistic,” Yoshio Takahashi, head strategist for non- Japanese debt in Tokyo at Barclays Capital, wrote in a research note today.

Yen Call Options

Traders are paying a larger premium for yen call options against the dollar, which grant the right to buy Japan’s currency, over puts that provide the right to sell it. The dollar-yen’s one-month 25-delta risk-reversal rate widened to minus 2.44 percent today from minus 2.22 percent yesterday.

The euro gained for a fourth day versus the dollar before a European report that may show the region’s manufacturing and services contracted at the slowest pace in seven months.

A composite index of activity in both industries rose to 42 in May from 41.1 in April, according to the median estimate in a Bloomberg survey of economists.

“We could see PMIs come in higher than expected, highlighting the improved sentiment in the region,” analysts at Standard Chartered Bank led by Callum Henderson, Singapore-based global head of currency research, wrote in a research note today. “It looks likely the euro-dollar could establish new highs for 2009 beyond January’s $1.406 high.”

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