The Yen Reacts to ECB & US Interest Rates

Yen Declines to Lowest Since January on `Deteriorating' Economy

Aug. 6 (Bloomberg) -- The yen fell to the lowest since January against the dollar after Japan's government said the economy is ``deteriorating,'' acknowledging for the first time that the country's longest postwar expansion has probably ended.

The currency also fell against the Swedish krona, South Korean won and Norwegian krone on speculation the Bank of Japan will keep borrowing costs at 0.5 percent, encouraging Japanese investors to send money abroad for higher returns. The euro traded near a seven-week low against the dollar before a European Central Bank meeting tomorrow when policy makers are forecast to keep interest rates unchanged while acknowledging the region's economy is slowing.

``The Japanese economy is slipping into a recession,'' said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. ``The concern is that Japanese interest rates are too low. This is one major reason people are selling the yen.''

The yen fell 0.7 percent to 109.14 per dollar at 10:15 a.m. in New York, from 108.35 yesterday. It touched 109.24, the lowest since Jan. 11. The euro traded at $1.5430, from $1.5454 yesterday. Earlier it touched $1.5409, the weakest since June 16. The euro advanced to 168.37 yen from 167.42.

South Africa's rand fell for a third day against the dollar as the country's biggest labor federation began a nationwide strike to protest higher power prices. The rand dropped 0.9 percent to 7.4493 per dollar as the one-day action shut mines and factories, reducing output from the world's biggest producer of precious metals.

`Entered a Recession'

The yen fell 0.9 percent against the South Korean won, 0.8 percent versus the Swedish krona and 0.7 percent against the Norwegian krone.

``There is a high possibility the economy has entered a recession,'' Shigeru Sugihara, head of business statistics at the Cabinet Office, said in Tokyo today.

Japan's benchmark interest rate is the lowest among developed nations, compared with 5.75 percent in Norway, 4.5 percent in Sweden and 5 percent in South Korea.

Japan's economy expanded at an average annualized pace of about 2.2 percent during the six years of growth that began in February 2002.

The ECB will keep its key interest rate at a seven-year high of 4.25 percent tomorrow, according to the median forecast of economists surveyed by Bloomberg News. ECB President Jean- Claude Trichet will hold a press conference after the rate decision tomorrow at 1:45 p.m. in Frankfurt.

`No Bias'

Trichet said on July 3 that he had ``no bias'' or ``pre- commitment'' after policy makers increased the main refinancing rate a quarter-percentage point.

``The ECB will send the message that they will keep the neutral stance,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto, a unit of Canada's biggest bank by assets. ``The risk is that they will acknowledge that growth is coming down faster than expected.''

Factory orders in Germany, adjusted for seasonal swings and inflation, declined 2.9 percent from May, the Economy Ministry in Berlin said today. That's the biggest drop since July 2007.

The inflation rate for the euro region accelerated to 4.1 percent in July, the fastest pace in more than 16 years and more than double the pace the ECB targets.

Traders pared bets the ECB will raise the main refinancing rate for a second time this year. The three-month Euribor contract for December yielded 5.04 percent, down from 5.06 percent yesterday.

The Federal Reserve left borrowing costs unchanged yesterday at 2 percent, saying ``downside risks'' to growth remain, while inflation is a ``significant concern.''