Yen Declines as Higher U.S. Treasury Yields Fuel More Demand for Dollar

Bloomberg.com   |  September 10 2010 1:52 EDT

The yen dropped against the dollar as the highest yields on 10-year U.S. Treasury notes in a month renewed international demand for U.S. assets as investors’ risk aversion declined.

The Japanese currency slipped against all 16 of its most- traded counterparts and the Swiss franc declined as a report showed China’s imports increased more than economists predicted. The yuan headed for its biggest weekly gain since June as the U.S. stepped up pressure on China to allow its currency to strengthen. The difference in yields between U.S. and Japanese 10-year notes widened from the narrowest level since April 2009.

“People are watching the difference between the U.S. and Japan and they’re more optimistic to buy the dollar due to this yield differential,” said Hidetoshi Yanagihara, a senior currency trader at Mizuho Financial Group Inc. in New York. “People are getting more optimistic about the upcoming economy in the U.S.”

The yen weakened 0.4 percent against the dollar to 84.15 at 12:31 p.m. in New York, from 83.78 yesterday It fell 0.7 percent to 107.11 per euro, from 106.37 yesterday. The euro traded at $1.2727 compared with $1.2696, after falling to $1.2644, the weakest since Aug. 31.

The Swiss franc weakened 0.5 percent to 1.2951 per euro from 1.2887 and fell 0.2 percent to 1.0175 per dollar.

Yield Premium

The premium investors demand to own U.S. 10-year Treasuries instead of similar-maturity Japanese debt rose to 163 basis points today, jumping 17 basis points from a low of 146 reached Sept. 7. A basis point equals 0.01 percentage point.

Chinese exports rose 34.4 percent and inbound shipments climbed 35.2 percent, leaving a $20.03 billion surplus, a customs bureau report showed today. It’s the third straight month the trade surplus has stayed higher than $20 billion. A Bloomberg News economist survey predicted import gains of 27.5 percent and 35 percent for exports.

The yuan gained 0.2 percent to 6.7692 per dollar, bringing its weekly advance to 0.5 percent, according to the China Foreign Exchange Trade System. That was the biggest gain since the week ended on June 25 when it also appreciated 0.5 percent.

Geithner Asks

U.S. Treasury Secretary Timothy F. Geithner said Sept. 8 on Bloomberg Television that China should let the yuan rise more quickly. The U.S. House Ways and Means Committee will discuss China’s currency policy next week.

“Those advocating a tougher line against China in the U.S. Congress may emphasize that August was the third consecutive monthly surplus above $20 billion,” strategists led by Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, wrote in a note to clients.

Haven currencies may extend their decline next week should the run of better-than-expected data persist. The Mannheim-based ZEW Center for European Economic Research will probably say on Sept. 14 its index of investor and analyst outlooks rose this month to 50, the highest since January 2008, from 44.3 in August, according to the median of 13 estimates in a Bloomberg News survey.

The outlook for the U.S. economy may improve next week as economists forecast reports will show consumer spending rose for a second month and manufacturing in the New York region expanded.

Retail Sales

Sales at U.S. retailers rose 0.3 percent in August and the Federal Reserve Bank of New York’s general economic index climbed to 8 in September from 7.1 the previous month, according to separate Bloomberg News surveys before the figures are released on Sept. 14 and 15.

The Canadian dollar, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, fell 0.3 percent to C$1.0366 per U.S. dollar. It earlier touched C$1.0288, the strongest since Aug. 19, after a report showed employers expanded payrolls by a net 35,800 jobs after cutting 9,300 positions in the previous month, Statistics Canada reported in Ottawa.

“The market is still on balance looking for the Canadian dollar to trade the Aug. 19 low on a mix of stable economics, a central bank that’s hiking interest rates and Canadian dollar financial flows,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto.