Yen Weakens on Speculation Japan Will Curb Gains

By Catarina Saraiva and Bo Nielsen -

Japan’s currency retreated from a five-week high against the euro after Finance Ministry and Bank of Japan officials met to discuss financial markets. Photographer: Tomohiro Ohsumi/Bloomberg

The yen weakened from a 15-year high against the dollar and fell versus the euro after Japanese officials said they’re closely watching the rise of the currency, fueling concern its surge in strength may be capped.

The Japanese currency fell against most of its major counterparts as Masaaki Shirakawa, governor of the nation’s central bank, said policy makers were studying currency markets and how they affected the country’s economy. The euro erased a loss versus the dollar, after dropping the most in almost 22 months yesterday, as U.S. unemployment-insurance claims unexpectedly rose.

“The fact that officials are becoming a little more vocal about the risks of yen strength to their very fragile economy, that has for the near term slowed its ascent,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. “The comments overnight by various Japanese officials have limited the yen’s near-term gains.”

The yen weakened 0.6 percent to 85.83 per dollar at 11:54 a.m. in New York, from 85.32 yesterday, when it appreciated past 85 to 84.73, the strongest level since July 1995. The U.S. currency gained as much as 0.6 percent to $1.2781 per euro before trading at $1.2859, from $1.2863, after a rally yesterday of 2.4 percent, the biggest since Oct. 24, 2008. The euro rose 0.6 percent to 110.37 yen, from 109.74.

The Standard & Poor’s 500 Index declined 0.4 percent, and the MSCI World Index lost 0.5 percent.

‘Intervention Watch’

Bank of Japan Governor Masaaki Shirakawa, said the bank is closely watching “substantial” movements in currency and stock markets.

“They keep talking about how they’re watching the market,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “Choppiness in the market is being attributed to people being on intervention watch -- they’re trying to play both sides.”

Japanese Finance Minister Yoshihiko Noda, pledging in an unscheduled conference call to work with Shirakawa, said he wasn’t planning a phone meeting with Group of Seven counterparts to discuss currency moves. Central banks intervene in the foreign-exchange market when they buy or sell currencies to influence exchange rates.

The euro fell earlier as data from the European Union’s statistics office showed output in the euro region’s economy dropped 0.1 percent from May, when it increased 1.1 percent. The median forecast of 32 economists in a Bloomberg News survey was for a gain of 0.6 percent.

Dollar Safety

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six U.S. trading partners, including the U.K., Canada and Japan, rose for a fourth day after U.S. jobless claims unexpectedly increased, fueling appetite for the currency’s safety. It gained 0.2 percent after surging yesterday as much as 2.2 percent, the most since January 2009.

Initial jobless claims increased by 2,000 to 484,000 in the week ended Aug. 7, the highest level since mid-February, Labor Department figures showed today in Washington. The number of people receiving unemployment benefits dropped, while those getting supplemental benefits surged by 1.34 million, reflecting the government’s extension of eligibility.

The Federal Reserve said Aug. 10 in its policy statement that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” It left the target rate for overnight loans between banks in a range of zero to 0.25 percent, where it’s been since December 2008.

Japanese Exports

The yen has risen 13 percent this year, the most among 10 developed-world currencies, Bloomberg Correlation-Weighted Currency Indices show. Its rally has fueled speculation the government may intervene to curb its appreciation.

Japan hasn’t intervened in the currency markets since March 16, 2004, when the yen was around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($173 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.

The country’s large manufacturers expect the yen to average 90.16 per dollar in the six months to March 2011, according to the Bank of Japan’s quarterly Tankan survey released July 1. Exports are about 13 percent of Japan’s economy.

Exporters said they can remain profitable as long as the yen trades at 92.90 per dollar or weaker, according to a Cabinet survey released in February. The breakeven point was 97.33 a year earlier.

Iran will reduce the proportion of euros and dollars in its reserves, while maintaining its overseas holdings of the Western currencies, in the face of sanctions over the country’s nuclear program, according to a Central Bank official in Tehran.

Dollars already have a smaller role in Iran’s trade and the use of euros also will be reduced, though neither will be eliminated from Iran’s accounts, Reza Nadali, head of the bank’s international department, said today in a phone interview.

“We won’t shun them,” and for oil transactions, “the bank accepts any currency agreement reached between the buyer and the seller,” the official said.