Feb. 26 (Bloomberg) -- The yen fell to a three-month low against the dollar and weakened versus the euro before government reports tomorrow that may show rising unemployment and falling consumer prices in Japan.
The Japanese currency is headed for its worst month against the dollar in 13 years and the poorest versus the euro since 2000 as the deepening recession reduces the yen’s appeal. The euro is poised for a second monthly loss against the dollar on concern financial turmoil in eastern Europe will worsen, backing the case for the region’s central bank to lower interest rates.
“The economics have got to a tipping point for the yen,” said Neil Mellor, a currency strategist in London at Bank of New York Mellon Corp., the world’s biggest custodian of financial assets. “We’re looking at a fresh era of deflation in Japan.”
The yen weakened to 97.96 per dollar as of 10:34 a.m. in London from 97.39 in New York yesterday. It reached 97.90 today, the lowest level since Nov. 14. It depreciated to 125.02 per euro, from 123.92 yesterday, when it touched 125.15, the weakest level since Jan. 9. The yen may trade at 105 per dollar within six months, Mellor said.
The yen dropped 7.5 percent against the dollar this year, its worst start since 2000, as traders bet the deteriorating Japanese economy will lead to deflation, reducing the currency’s appeal as a refuge from the global financial crisis. The Bank of Japan maintained a policy of flooding the financial system with cash from March 2001 through March 2006 to counter deflation.
‘Cataclysmic Exports’
Japan’s consumer prices, excluding fresh food, may have fallen 0.1 percent in January from a year earlier, tomorrow’s report will show, according to the median of 32 economists surveyed by Bloomberg News. The unemployment rate probably rose to 4.6 percent last month, the highest level since February 2005, a separate survey showed.
The trade deficit widened in January to the most in two decades as exports slumped by 46 percent, the Finance Ministry said yesterday in Tokyo.
“The export figures yesterday were cataclysmic,” said Mellor. “There’s a great chance that the Bank of Japan is going to turn on the printing press again, and then we’re back to where we were in 2001.”
Swings in the yen have been a “a bit excessive” and the degree of fluctuations in currencies, rather than their levels, warrant close attention, Bank of Japan board member Tadao Noda said today.
“It’s important for companies and households that currencies generally move in a stable manner,” Noda told reporters in Naha, Okinawa.
Weekly Decline
Japan’s currency headed for a fifth weekly loss against the dollar after a Cabinet Office report last week showed the economy shrank the most since the 1974 oil shock. The yen reached a 13- year high versus the U.S. currency on Jan. 21, after surging 23 percent last year.
The dollar’s advance against the yen still may be tempered as the currency approaches so-called resistance at 98.90, according to Bank of America Securities-Merrill Lynch Japan.
The 98.90 yen level is a 50 percent retracement of the dollar’s decline from the August high of 110.66 yen to the January low of 87.13 yen, said Tomoko Fujii, a rates and currency strategist at the recently merged research division of Merrill Lynch and Bank of America Corp. in Tokyo, referring to a series of numbers known as the Fibonacci sequence. Resistance is a level where sell orders may be clustered.
The “strong” resistance levels will be “98.90, above which there is a psychologically important level of 100.00,” Fujii wrote in a report yesterday.
Dollar Index
The dollar traded at $1.2760 per euro, from $1.2723 in New York yesterday. It was at $1.4244 versus the British pound, from $1.4201, and traded at 1.1641 Swiss francs, from 1.1699.
The ICE’s Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, krona and Swiss franc, traded at 87.646 from 87.906. It touched 88.254 on Feb. 18, the strongest since a 2 1/2-year high reached on Nov. 21.
The euro headed for a third weekly decline against the dollar amid speculation European Central Bank President Jean- Claude Trichet will express increased concern today about the currency region’s financial system and signal an interest-rate reduction at the next meeting March 5.
European confidence in the economic outlook dropped to the lowest on record in February, the European Commission in Brussels said today, increasing pressure on the ECB to loosen monetary policy. German unemployment rose a seasonally adjusted 40,000 to 3.31 million in February, a fourth straight monthly increase, the Federal Labor Agency said.
Ordonez, Nowotny
The Frankfurt-based ECB is “obliged” to study the use of unconventional policy tools to revive the economy, ECB Governing Council member Miguel Angel Fernandez Ordonez said yesterday, adding and a review of possible steps is “progressing.” Fellow council member Ewald Nowotny said Feb. 17 a discussion on such measures is “going on in the ECB and we have to see how things develop.”
Unconventional measures may include so-called quantitative easing, whereby the ECB may buy government securities to lower interest rates.
Standard & Poor’s yesterday cut Ukraine’s credit rating by two levels after it downgraded Latvia’s debt to junk on Feb. 24. The euro dropped 1.7 percent versus the dollar on Feb. 17, when Moody’s Investors Service said the credit ratings of Austrian, Swedish and other banks with subsidiaries in eastern Europe may be cut as economies in the region deteriorate.
‘Difficult to Resolve’
“The financial crisis in eastern Europe seems to have just begun and will probably be difficult to resolve,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-largest lender. “This is likely to lead to selling of the euro,” which may decline to $1.2670 and 123.50 yen today, he said.
Trichet will speak on European competitiveness at 1 p.m. in Dublin. On Feb. 23, he said the financial system was under “severe strain” that is hampering an economic recovery.
Investors increased bets the ECB will lower its 2 percent benchmark rate at next week’s meeting. The yield on the three- month Euribor interest-rate futures contract due in March fell two basis points to 1.66 percent from 1.68 percent yesterday.
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