The Japanese currency gained versus the British pound and the Canadian dollar as investors cut so-called carry trades on concern the global economy will cool. The yen remained higher after Bank of Japan Deputy Governor Toshiro Muto said Japan's economy will keep slowing ``for the time being.''
``Japanese stocks look pretty weak,'' said Shinichi Takasaka, manager of foreign exchange and financial products trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``There are still a lot of risks out there'' and ``some traders are buying the yen.''
The yen climbed to 109.66 against the U.S. currency as of 12:31 p.m. in Tokyo from 110.04 yesterday in New York. It traded at 161.02 per euro from 161.31. The euro bought $1.4682 from $1.4659. The MSCI Asia Pacific Index of regional shares fell 0.6 percent, snapping two days of gains, and the Nikkei 225 Stock Average dropped 0.8 percent.
The pound fell 0.4 percent to 214.77 yen, while the Canadian dollar declined 0.3 percent to 108.62 yen. The Australian dollar weakened 0.2 percent to 97.01 yen.
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.
Bank of Japan
Goldman Sachs Group said there's a 50 percent chance Japan will slip into recession and cut its 2008 growth estimate for the world's second-largest economy. BOJ Deputy Governor Muto said the central bank has no preset schedule for adjusting interest rates, at 0.5 percent, and it may be hard for monetary authorities around the world to deal with the risk of slowing economic growth coupled with faster inflation.
``Muto mentioned downside risks for the global economy, the U.S. and Japanese economies,'' said Kenichiro Yoshida, a senior economist and currency analyst at Mizuho Research Institute in Tokyo, a unit of Japan's second-largest lender by assets. This ``prompted investors' to reduce risk and pared the yen carry trade.''
The yen may rise to as high as 105 per dollar this quarter, Yoshida said.
The euro was near the lowest in a week against the dollar on bets the European Central Bank will signal it is unlikely to raise interest rates this year because of a slowdown in economic growth.
Hawkish Trichet
Interest-rate futures yesterday showed traders pared bets the ECB will raise borrowing costs this year after reports showed German industrial production, exports and retail sales unexpectedly declined. The implied yield on the Euribor June futures contract fell 4 basis points yesterday to 4.34 percent.
Today's rate decision is scheduled at 1:45 p.m. Frankfurt time. Trichet will hold a press conference 45 minutes later.
``Worsening economic indicators are heightening a sense of uncertainty about the ECB's rate policy,'' said Seiichiro Muta, director of foreign exchange in Tokyo at UBS AG, the world's second-largest currency trader. ``Trichet cannot be hawkish on rate increases. The euro looks weak.''
Europe's single currency may decline to $1.4620 today, he said.
Losses in the dollar may be limited on speculation Federal Reserve Chairman Ben S. Bernanke will say the U.S. can avoid a recession in a speech in Washington today.
Bernanke Speech
St. Louis Fed Bank President William Poole said yesterday the dollar won't ``go way south'' and predicted economic growth will accelerate as the year progresses.
``The dollar should be stronger,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``Poole didn't think they were going into a recession. Bernanke won't be all doom and gloom and will say something like a recession isn't certain.''
The currency may gain to 111 yen and $1.46 per euro today, Morriss said.
Futures contracts traded on the Chicago Board of Trade show 76 percent odds the Fed will cut the benchmark interest rate a half-percentage point from 4.25 percent on Jan. 30. The chances for a quarter-point reduction are 24 percent, down from 66 percent a week earlier.
The British pound traded at 74.98 pence per euro, near a record low of 75.03 pence, as traders increased bets the Bank of England will cut interest rates today to prevent declining home prices from weighing on the economy.
The currency traded near a 10-month low against the dollar after a report yesterday showed U.K. consumer confidence dropped to the lowest in almost a year.
U.K. Rates
There's a 61 percent chance the BOE will lower its benchmark interest rate a quarter-percentage point from 5.5 percent today, according to a Credit Suisse index of probability derived from overnight indexed swap rates. The central bank releases its decision at noon today in London.
``The pound looks overvalued, and I expect it to fall,'' said Kengo Suzuki, currency strategist in Tokyo at Shinko Securities Co., Securities Co., which will merge in May with Mizuho Securities to create Japan's third-largest brokerage. ``We can't rule out a preemptive rate cut from the BOE today as the economic situation hasn't improved.''
The pound may fall to $1.95 in the next two days, he said. It bought $1.9577 from $1.9585 yesterday.
