Yen gains for 2nd day as China output grows less than forecast

The yen rose for a second day against the euro and the dollar after Chinese reports showed industrial output grew less than expected and exports fell, spurring demand for the safety of Japan’s currency.

The yen gained versus all of the 16 major currencies after China also said producer and consumer prices both dropped. The euro slid to the lowest level in almost a week against Japan’s currency after Standard & Poor’s Ratings Services cut the credit ratings of Estonia and Latvia. South Korea’s won fell for a third day as a decline in U.S. stock futures spurred investors to sell emerging-market assets.

“The data indicate China’s economy may not be growing as strongly as people are hoping,” said Takashi Kudo, director of foreign-exchange sales at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This is leading to risk aversion, with the yen being bought.”

The yen advanced to 136.67 per euro as of 1:50 p.m. in Tokyo from 137.36 in New York yesterday, after earlier rising to 136.46, the strongest level since Aug. 5. It climbed to 96.66 per dollar from 97.15. The euro traded at $1.4138 from $1.4140, and bought 85.80 British pence from 85.79 pence. South Korea’s won slumped 1.1 percent to 1,242.45 per dollar.

China’s statistics bureau said industrial production grew 10.8 percent in July, below the median estimate for a 11.5 percent gain in a Bloomberg survey. Consumer prices fell 1.8 percent and producer prices slid a record 8.2 percent. Exports dropped 23 percent from a year earlier, the customs bureau said.

Korea wins

The won extended its losing streak to the longest in four weeks as U.S. stock futures fell and Asian shares outside Japan slipped. The MSCI Asia Pacific excluding Japan index dropped 0.2 percent and S&P 500 Index futures declined 0.1 percent.

The won is weaker “mostly due to the global strengthening of the U.S. dollar and U.S. stocks coming off,” said Kim Yule, a currency dealer at BNP Paribas SA in Seoul. Overseas demand for Korean equities will limit the currency’s decline, he said.

The yen also rose against the euro after Standard & Poor’s yesterday lowered Estonia’s long-term sovereign credit rating to A- and cut Latvia’s rating to two notches below investment grade.

“The European economy is facing a variety of problems, especially Eastern Europe,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “This may give the foreign- exchange market the motivation to be driven by the search for safety” offered by the dollar and the yen, he said.

The euro traded near a one-week low versus the dollar before a German report economists said will show wholesale prices fell for a ninth month, giving the European Central Bank more reason to keep borrowing costs low.

Euro to ‘struggle’

German prices fell 9.7 percent in July from a year earlier, after declining 8.8 percent the previous month, according to a Bloomberg News survey of economists. The Federal Statistics Office will release the data in Wiesbaden today.

“We suspect the euro-dollar will struggle this week, given relatively the anemic economic performance of the euro-zone,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington.

It will take time before recovery in the 16-nation euro region begins, ECB council member Erkki Liikanen said, according to the Finnish newspaper Uutispaeivae Demari yesterday.

The euro is likely to weaken to 130 yen by year-end after the 16-nation currency failed to rise through so-called resistance at 141.04 yen, according to Deutsche Bank AG, citing trading patterns.

Resistance at that level represents the 50 percent retracement of the euro’s decline from last year’s high of 169.96 yen reached on July 23, to this year’s low of 112.12 on Jan. 21, based on a series of numbers known as the Fibonacci sequence. Resistance refers to levels where sell orders may be clustered. Since reaching January’s low, the euro has gained 22 percent versus the yen.

Euro resistance

“The European currency has strengthened too quickly,” said Koji Fukaya, a senior currency strategist at the Tokyo unit of Deutsche Bank, the world’s biggest foreign-exchange trader. “It will struggle to break 140 yen.”

Losses in the dollar were tempered by speculation U.S. reports this week will provide more evidence the world’s largest economy is emerging from recession.

Sales at U.S. retailers rose 0.8 percent in July, after a 0.6 percent gain in June, a Bloomberg survey showed before the Commerce Department’s report on Aug. 13. Industrial production increased 0.4 percent in July, following a 0.4 percent decline in June, according to another Bloomberg survey, before the Federal Reserve’s report on Aug. 14.

Eventual turn higher

“The case is building for an eventual turn higher of the dollar,” Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia, wrote in a research note yesterday. “The U.S. economy is improving and the economy will likely emerge from the global recession ahead of Europe.”

U.S. policy makers will keep the benchmark as low as zero at the two-day Federal Open Market Committee meeting that starts today, according to all 43 economists surveyed by Bloomberg.

The Dollar Index, which the ICE uses to track the dollar against currencies of six major U.S. trading partners such as the euro, was at 79.171 from 79.256 yesterday.