Yen, dollar rise on heightened global turmoil

Yen, dollar rise on heightened global turmoil By William L. Watts, MarketWatch Last update: 7:30 a.m. EST Feb. 16, 2009LONDON (MarketWatch) - The Japanese yen and the U.S. dollar pushed higher Monday, after worries about global economic turmoil were reinforced by the weekend Group of Seven meeting and a steep fourth-quarter contraction in Japan's gross domestic product. The Japanese economy shrank by a larger-than-expected 3.3% in the final three months of 2008 compared to the previous quarter, according to government data released Monday. Compared to the final quarter of 2007, GDP fell 12.7% -- the largest contraction since 1974. See full story. Traders said the figures served to reinforce fears about the depth of the global economic downturn, spurring further safe-haven flows into the Japanese yen and U.S. dollar. In addition, the lack of any language in the weekend G7 communique repeating an emergency statement from last October warning against "excessive volatility" in the exchange rate of the yen also gave a green light to yen buyers, analysts said. "The G7 may have seen any related reference as unnecessary in this communique," wrote economists at Standard Chartered Bank. "However, the fact that they left it out may well, in our view, cause markets to test their resolve in the next few days on the" Japanese yen. Read about the G7 meeting. The U.S. dollar fell to 91.68 yen versus the Japanese currency, down slightly from 91.86 yen in North American trade late Friday. The euro fell to 117 yen from around 117.92 yen. Strategists at BNP Paribas said rising risk aversion should allow the dollar to outperform the yen in the future. The dollar "has been the globe's main liability currency and with economies in stress, liability reduction has moved to the forefront of corporate and household activity," they wrote. "We underline our view that that U.S. dollar can only come under selling pressure when corporate and household balance sheets have re-strengthened, putting them in a position to export dollar." The dollar index ($DXY:US Dollar Index Future - Spot Price News , chart , profile , more Last: 86.70+0.16+0.18% 7:12am 02/16/2009 Delayed quote dataAdd to portfolio Analyst Create alert Insider Discuss Financials Sponsored by: $DXY 86.70, +0.16, +0.2%) , which measures the U.S. unit against a trade-weighted basket of six major currencies, traded at 86.095, virtually unchanged from late Friday. Volume was expected to remain light with U.S. financial markets closed Monday for a public holiday. Controversy doesn't spill over to FX Traders said there was little lasting impact from controversy surrounding Japanese Finance Minister Shoichi Nakagawa's performance at a Saturday news conference during the G7 gathering in Rome. Japanese news reports on Monday said Prime Minister Taro Aso asked Nakagawa to stay on. Nakagawa faced calls to resign after he slurred his speech and appeared intoxicated at the news conference. Nakagawa denied that he had been intoxicated and blamed his performance on a combination of too much cold medicine and a "sip" of wine at an earlier luncheon. Meanwhile, the British pound was under heavy pressure after the G7 statement made no mention of the pound's recent sharp decline. The pound fell to $1.4240 against the dollar, down from $1.4356 late Friday. The euro rose to 89.60 pence from 89.17 pence. "While drawing attention to the sharp declines in the pound may have only added to already heightened fears in the market, the attitude of benign neglect apparent in the statement from Rome is enough evidence to suggest that in the absence of excessive volatility, policymakers may welcome the trends in specific currencies that foster a reordering and rebalancing of the global economy," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange, in a research note. And that "would invariably include a persistently weak pound," Gallo said. Meanwhile, the communique's praise of China's fiscal stimulus efforts and past efforts to increase the flexibility of the yuan currency were "incredibly telling" given U.S. Treasury Secretary Timothy Geithner's description of China last month as a currency manipulator, said Simon Derrick, chief currency strategist at Bank of New York Mellon. The G7 praised China's "continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the renminbi in effective terms and help promote more balanced growth in China and in the world economy." With the United States desperate for international funding of its own stimulus efforts, the change in tone appeared to be a "realization of the realpolitik of the situation," Derrick said. The statement differed from the October G7 communique, which more aggressively urged Chinese authorities to allow "accelerated appreciation" of the renminbi exchange rate. The statement appeared to be putting the "In our view, this change in rhetoric should be reasonably well received in Beijing," said the Standard Chartered economists. "It may not be exactly the wording they wanted, but it represents an important improvement." William L. Watts is a reporter for MarketWatch in London.