Yen Trades Near Five-Month Low Versus Euro on High-Yield Demand

The yen traded near a five-month low against the euro and dropped versus the pound on speculation U.S. government plans to help banks dispose of toxic assets will stoke investor appetite for higher-yielding currencies.

Sterling gained versus the dollar as accelerating inflation in the U.K. added to bets the Bank of England will tolerate a stronger pound. The Czech koruna was the biggest loser against the dollar among the 171 currencies tracked by Bloomberg after Prime Minister Mirek Topolanek lost a no-confidence vote.

“It really looks to be primarily a correlation trade based on risk appetite,” said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “When risk sentiment improves, the crosses appreciate.”

Japan’s currency traded at 131.64 per euro at 4:18 p.m. in New York, compared with 132.17 yesterday. It touched 134.51, the weakest level since Oct. 21. Japan’s currency lost 0.8 percent to 97.74 per dollar from 96.95. The dollar appreciated 1.2 percent to $1.3471 per euro from $1.3633. The greenback reached $1.3738 on March 19, the weakest since Jan. 9.

The yen may slip to 105 versus the dollar next month as the new fiscal year begins in Japan and asset managers there reinvest funds internationally, Dolan said.

The pound appreciated as much as 1.4 percent to $1.4778, the highest level since Feb. 10, as an Office for National Statistics report showed annual inflation unexpectedly accelerated last month.

U.K. Inflation

Consumer prices in the U.K. climbed 3.2 percent from a year earlier after a 3 percent increase in January. The median forecast of 28 economists surveyed by Bloomberg was for a 2.6 percent pace.

The koruna tumbled 2.2 percent to 20.097 versus the dollar and 1.2 percent to 27.110 against the euro on the defeat of the Czech government. The prime minister will stay in power until President Vaclav Klaus appoints a new administration or early elections are held. The currency declined 9.8 percent in the past six months as the global credit crunch deepened and investors sold higher-yielding assets.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, gained 0.6 percent today to 83.86 after reaching 82.63 on March 19, the lowest level since early January.

Fed’s Bond Buying

The gauge decreased 4.7 percent this month on speculation the Fed was debasing the dollar when the central bank said on March 18 it would buy as much as $300 billion of Treasuries and increase purchases of agency mortgage-backed securities.

The correlation between the MSCI World equity index and the Dollar Index was minus 0.549 since reaching a low this year of minus 0.574, Bloomberg data show. A reading of minus 1 means the dollar and stocks always trade in the opposite direction.

“The dollar’s decline of sensitivity to equities could indicate the rally in the euro is running out of steam,” said Matthew Strauss, a senior currency strategist at RBC Capital Markets in Toronto. “The yen is a clearer trade.”

The 14-day relative strength index on the 16-nation euro versus the greenback, a gauge used by traders and analysts to project price trends, decreased to 66.7 after holding above 70 for the past four days, a signal the currency’s gain may be too fast to sustain.

The pound appreciated as much as 2.7 percent to 145.09 yen, the highest since Dec. 1, on speculation Japanese investors will seek higher-yielding assets elsewhere. South Korea’s won advanced 1.6 percent today to 14.13 versus the yen, and Australia’s dollar climbed 0.1 percent to 68.29. The Bank of Japan’s target lending rate of 0.1 percent compares with 3.25 percent in Australia, 2 percent in South Korea and 0.5 percent in the U.K.

‘Risk Appetite’

“Sterling-yen should perform pretty well as long as equities rally and risk appetite improves,” said Sharada Selvanathan, a currency strategist in Hong Kong at BNP Paribas. “There could also be some flows leaving Japan as investors look outside for investment opportunities.”

The yen erased its decline versus the euro as the Standard & Poor’s 500 Index dropped 2 percent after rallying 7.1 percent yesterday. The MSCI World Index lost 0.9 percent, while the Nikkei 225 Stock Average rose 3.3 percent, its sixth gain in seven days.

Treasury Secretary Timothy Geithner announced yesterday a plan to finance as much as $1 trillion in purchases of illiquid bank assets, sapping demand for safety.

Japan’s currency declined today for a third day against the dollar on speculation a government report tomorrow will show the economy posted a trade deficit for a fifth month, indicating reduced demand for the nation’s exports.

The Finance Ministry may say the custom-cleared trade shortfall was 20 billion yen ($204 million) in February, compared with a record 956.9 billion yen in the previous month, according to a separate Bloomberg survey of economists.

The yen depreciated against 15 of the 16 major currencies this quarter, dropping the most versus the British pound and South Korean won. Japan’s currency decreased 1.8 percent versus the won on speculation South Korea’s economic slump will deepen.