Yen Rises as Decline in Asian Stocks Spurs Demand for Safety

- The yen rose against the euro and the dollar after China’s benchmark stock index fell into a so- called bear market, reigniting concern that the global economic recovery is stalling.

The yen climbed to the strongest level in three weeks against the dollar as the Shanghai Composite Index extended its losses since this year’s high on Aug. 4 to 20 percent. The euro fell against 14 of the 16 most-active currencies as a government report showed German producer prices fell at the fastest pace in 60 years last month. The U.K. pound weakened after the minutes of this month’s Bank of England policy meeting showed Governor Mervyn Kingfavored a bigger increase in asset purchases.

“China has been leading the stock rally and with that reversing, we’re seeing risk aversion and the constituent benefit for currencies like the yen,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “People are getting nervous.”

The yen strengthened to 132.88 per euro as of 6:30 a.m. in New York, from 133.84 yesterday. Japan’s currency appreciated to 94.21 per dollar from 94.69 after trading at 94.14 earlier, the strongest level since July 29. The dollar gained to $1.4104 per euro from $1.4136.

China’s main stock index, which tracks the bigger of China’s stock exchanges, slumped 4.3 percent, leading other Asian bourses lower and boosting demand for the yen as a refuge. Europe’s Dow Jones Stoxx 600 Index sank 1.2 percent.

Dollar Index

The yen rose against all 16 most-traded currencies tracked by Bloomberg. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of the U.S.’s biggest trading partners, including the euro, yen, pound and Swiss franc, rose 0.3 percent to 79.160.

The yen typically rises during times of financial turmoil because Japan’s trade surplus reduces the nation reliance on foreign capital. The dollar benefits as the world’s main reserve currency.

Producer prices in Germany, the largest of the economies that share the euro, dropped 7.8 percent from a year earlier after falling 4.6 percent in June, the Federal Statistics Office in Wiesbaden said today. That’s the biggest decline since the office started to calculate the series in 1949. The median of 21 estimates in a Bloomberg News survey was for a 6.5 percent drop.

Germany is preparing countermeasures for a new credit crunch early next year, the Daily Telegraph reported, citing Economic State Secretary Hartmut Schauerte.

Europe Concern

European Central Bank council member Axel Weber said in an interview in the Sueddeutsche Zeitung newspaper on Aug. 17 that the ECB will “closely monitor” bank lending to firms, while saying that there are no signs of a credit crunch in Germany. The ECB will start withdrawing stimulus measures once the economy recovers and financial markets stabilize, Die Zeit reported, cited Weber today as saying in an interview.

“The euro zone is indeed lagging,” Markus Krygier, a money manager at CA Asset Management in London, said in an interview on Bloomberg Television. “The optimism about a recovery in the euro zone has been a little bit overdone.”

The Bank of England’s Monetary Policy Committee voted 6-3 to raise the amount it will spend as part of its quantitative- easing program by 50 billion pounds ($82 billion), according to minutes of the Aug. 6 decision released by the central bank today in London. King, Timothy Besley and David Miles dissented in favor of a 75 billion-pound expansion.

The central bank is spending 175 billion pounds buying assets in a move aimed at pushing down borrowing costs to revive the U.K.’s shrinking economy.

‘Greenback Emissions’

The pound dropped to $1.6388, from $1.6561 yesterday, and was weakened to 86.08 pence per euro, from 85.37 pence.

The dollar is under threat from the “monetary medicine” that has been pumped into the financial system, billionaire Warren Buffett wrote in a New York Times commentary yesterday.

“Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” Buffett, 78, wrote. The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year, while net debt will increase to 56 percent of GDP, he said.

The U.S. currency will drop the most against emerging- market counterparts as it loses its status the world’s reserve currency, Curtis A. Mewbourne, portfolio manager at Pacific Investment Management Co., which runs the world’s biggest bond fund, wrote in a report on the company’s Web site.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.