Japanese Bonds Drop for Second Week on Improving U.S. Economy

By Issei Morita

June 2 (Bloomberg) -- Japan's government bonds fell for a second week, pushing yields to the highest in seven months, on speculation export demand from the U.S. will be supported as the economy recovers from a slowdown.

Japanese bonds due in 10 years or more last month handed investors the biggest loss in almost a year, according to a Merrill Lynch & Co. index. Benchmark 10-year bonds declined as reports this week showed U.S. consumer confidence and business activity increased, adding to expectations the economy will rebound from the slowest quarterly growth in more than four years.

``Japan's bond yields finally started to rise and investors are reluctant now to buy,'' said Satoshi Kon, who helps oversee the equivalent of about $19 billion in Japanese debt at the Pension Fund Association, which has more than 1,600 corporate funds as members. ``There is a widespread expectation that the U.S. economy is now rebounding.''

Benchmark 10-year bond yields rose 5 basis points this week to 1.77 percent in Tokyo, according to Japan Bond Trading Co., the nation's largest interdealer debt broker. The yield on the 1.7 percent bond due March 2017 climbed as high as 1.775 percent, the most since Oct. 26.

The yield on the five-year note touched 1.375 percent, the highest since August. A basis point is 0.01 percentage point.

Worst Return

Japanese bonds maturing in 10 years or longer handed investors a loss of 0.9 percent in May, the worst return since June last year, when they incurred a loss of 1.5 percent, according to the Merrill Lynch index.

Ten-year yields rose 13 basis points last month, less than half the advance of similar-maturity U.S. Treasury yields. The spread between 10-year Japanese and U.S. yields was 3.15 percentage points yesterday, compared with the average of 3.04 points in the past year.

``Yields overseas are high on economic optimism, and Japan's yields have room to catch up,'' said Xinyi Lu, chief strategist of the international treasury division at Mizuho Corporate Bank Ltd. in Tokyo.

Large Redemption

The decline in bonds was limited by speculation buying in the secondary market will increase this month as more debt will mature than the Ministry of Finance is scheduled to sell.

``This month we have a large redemption coming,'' said Maki Shimizu, a bond strategist at UBS Securities Japan Ltd. in Tokyo. The extra demand for bonds may push the 10-year yield down to 1.7 percent by the end of next week, she said.

Redemption of maturing bonds and purchases by the central bank and Ministry of Finance will remove 3.2 trillion yen ($26.2 billion) of government debt from the market this month, according to calculations by Mitsubishi UFJ Securities Co.

Japan's bonds also fell this week on concern the central bank will raise borrowing costs as early as next quarter, said Akio Kato, senior portfolio manager at Kokusai Asset Management Co. in Tokyo. Government reports this week showed the jobless rate dropped to a nine-year low and household spending rose for a fourth month.

Bank of Japan Governor Toshihiko Fukui said last month that even with prices falling the risk of excessive investment might be a reason to raise interest rates. The bank key overnight lending rate is 0.5 percent.

Fukui's recent comments have ``reminded us that the BOJ's willingness to increase rates is very firm,'' Kokusai's Kato said. The bank will increase rates as early as August, he said.

The gap in yields between two- and 20-year bonds narrowed to 1.15 percentage points on May 30, the least since July 2003, according to data compiled by Bloomberg using compound yields.

Bond futures for June delivery declined 0.57 this week to 132.86 on the Tokyo Stock Exchange.

To contact the reporter on this story: Issei Morita in Tokyo at imorita@bloomberg.net .
Last Updated: June 1, 2007 18:51 EDT

Japan's Stocks Advance, Paced by Automakers; Toyota Rises

By Makiko Suzuki

June 1 (Bloomberg) -- Japanese shares gained, led by automakers, on speculation Toyota Motor Corp.'s U.S. sales rose in May and that the company will report higher-than-estimated earnings for the first three months of this business year.

Denso Corp. and Aisin Seiki Co., Toyota affiliates that make auto parts, jumped. Nippon Mining Holdings Inc. and Mitsui & Co. advanced after prices of crude oil and metals climbed.

``Investors bought Toyota on speculation it will post first-quarter earnings that are much better than the company forecast,'' said Mitsushige Akino, who oversees the equivalent of $470 million at Ichiyoshi Investment Management Co. in Tokyo. ``Commodity shares are also on a rising trend helped by a more optimistic outlook on oil and metals prices.''

The Nikkei 225 Stock Average added 83.13 or 0.5 percent, to 17,958.88. The Topix index rose 12.20, or 0.7 percent, to 1767.88.

Toyota jumped 160 yen, or 2.2 percent, to 7,460, leading gains by automakers. Denso, Japan's biggest auto-parts maker which is 23 percent owned by Toyota, advanced 60 yen, or 1.4 percent, to 4,330. Aisin Seiki, an affiliate of Toyota which makes transmissions and clutches, climbed 100 yen, or 2.4 percent, to 4,210.

Toyota probably moved closer in May to ending Ford Motor Co.'s 76-year reign as the second-biggest seller of automobiles in the U.S.

Toyota Sales

Ford's sales may have dropped in May for a seventh straight month and Toyota's probably rose, analysts surveyed by Bloomberg said. Through April, Ford's lead in U.S. sales had narrowed to 50,242 vehicles from 232,922 after the first four months last year. Automakers report U.S. sales later today.

Toyota forecast its smallest profit increase in a decade on May 9, citing slowing U.S. growth and investments in new factories. The carmaker said net income will probably rise by only 0.4 percent for this business year and North American sales gains may slow to 1.6 percent from 15.1 percent last year.

Nippon Mining, which made almost 80 percent of its sales from oil refining, advanced 29 yen, or 2.7 percent, to 1,099. Mitsui & Co., which trades industrial fuel and metals, jumped 70 yen, or 2.9 percent, to 2,470. Sumitomo Metal Mining Co., the nation's largest non-ferrous metal producer, rose 135 yen, or 4.9 percent, to 2,910.

Crude oil for July delivery advanced 0.8 percent to $64.01 a barrel yesterday and the July contract for copper jumped 2.8 percent. Oil was recently at $64.16 in after-hours electronic trading.

Dell's Earnings

Technology-related shares gained after Dell Inc., the world's No. 2 personal computer maker, posted earnings that beat analyst estimates.

Advantest Corp., the world's biggest maker of memory-chip testing equipment, climbed 80 yen, or 1.5 percent, to 5,280. NEC Corp., Japan's largest personal computer maker, added 6 yen, or 1 percent, to 626.

``Solid earnings in the U.S. will also encourage investors to buy technology shares and I bet those stocks will lead indexes once benchmarks start to have a big rally,'' said Ichiyoshi's Akino.

Dell surged as much as 8.3 percent in extended trading in New York after reporting that its first-quarter profit and sales exceeded analyst estimates and said it will cut 10 percent of its staff.

Ratings Raised

Mitsubishi Corp., Japan's biggest trading company which sells industrial fuel and coking coal, jumped 115 yen, or 3.9 percent, to 3,080 after Goldman, Sachs & Co. recommended investors buy the stock, citing a better outlook for prices of coking coal. The brokerage had a ``neutral'' rating before. Mitsubishi was the most actively traded stock by value, with 124.7 billion yen ($1.02 billion) in shares changing hands.

Kajima Corp., Japan's biggest general contractor by sales, surged 23 yen, or 4.6 percent, to 519. Taisei Corp., the nation's second largest, climbed 16 yen, or 4 percent, to 417. Credit Suisse Group raised its rating on the stocks to ``outperform'' from ``neutral'' and recommended investors increase their allocation of funds to contractors to the same proportion as in benchmarks.

Takeda Pharmaceutical Co., Japan's No. 1 drugmaker by revenue, gained 130 yen, or 1.6 percent, to 8,300. Nikko Citigroup Ltd. lifted its 12-month share-price estimate to 9,200 yen from 8,900 yen.

Nikkei futures expiring in June rose 0.5 percent to 17,950 in Osaka and gained 0.5 percent to 17,940 in Singapore.

The Nikkei advanced 2.7 percent this week, the first back- to-back weekly gains since February 23. The Topix added 3.1 percent.

Advantest Corp. (6857 JT)
Aisin Seiki Co. (7259 JT)
Denso Corp. (6902 JT)
Kajima Corp. (1812 JT)
Mitsubishi Corp. (8058 JT)
Mitsui & Co. (8031 JT)
NEC Corp. (6701 JT)
Nippon Mining Holdings Inc. (5016 JT)
Sumitomo Metal Mining Co. (5713 JT)
Taisei Corp. (1801 JT)
Takeda Pharmaceutical Co. (4502 JT)
Toyota Motor Corp. (7203 JT)

To contact the reporter for this story: Makiko Suzuki in Tokyo at Msuzuki13@bloomberg.net
Last Updated: June 1, 2007 02:39 EDT

Japan's Consumer-Price Declines Slow to 0.1% (Update6)

By Mayumi Otsuma

May 25 (Bloomberg) -- Japan's consumer prices fell at a slower pace in April, signaling gains may soon resume, making it easier for the central bank to raise interest rates.

Core prices, which exclude fresh food, declined 0.1 percent from a year earlier, the statistics bureau said today in Tokyo, matching economists' estimates. The measure of inflation fell 0.3 percent in March, the steepest drop in two years.

Rising prices would shore up support for the Bank of Japan's policy of increasing its 0.5 percent benchmark interest rate, the lowest among major economies. Governor Toshihiko Fukui said last week that the bank could raise rates even with prices falling to prevent excessive investment and sustain growth.

``The improvement of consumer prices certainly provides relief and gives the BOJ's arguments some conviction,'' said Eishi Yokoyama, an economist at AIG Global Investment Corp. in Tokyo. ``We're going to see more speculation among investors about an early rate hike.''

The yen traded at 121.34 per dollar at 4:58 p.m. in Tokyo from 121.41 before the report was published, and earlier climbed as high as 120.86. The yield on Japan's five-year note rose 3 basis points to 1.3 percent, the highest level in four months.

Fukui has said prices will rise again once the effect of a gain in oil prices last year fades. The bank needs to increase the key rate as the economy expands and inflation gathers pace, he said.

End of Deflation

``The end of deflation is in sight,'' Economic and Fiscal Policy Minister Hiroko Ota said today. ``The risk that prices may keep falling remains, so we can't yet declare the end of deflation.''

Finance Minister Koji Omi said there was ``some improvement'' in prices last month. He said the central bank's policy should support economic growth.

April's decline in core consumer prices was the third straight monthly drop. Core prices in Tokyo, a harbinger of nationwide prices, were unchanged for a second month in May, also in line with economists' expectations.

Dubai crude, a benchmark for Asian refiners, traded at more than $70 a barrel last August, compared with around $67 today.

``The impact of last summer's oil price gains near records will linger over core prices for the time being, and they won't become positive until November,'' said Mitsumaru Kumagai, chief fixed-income strategist at Merrill Lynch & Co. in Tokyo.

IMF, OECD

Both the International Monetary Fund and the Organization for Economic Cooperation and Development yesterday urged the bank to keep rates on hold until prices ``firmly'' rise. The IMF said it's ``appropriate'' for the bank to gradually raise rates.

The bank needs to closely watch how companies pass recent increases in energy and raw material costs to consumers, some members of the policy board said at an April 9-10 meeting, according to minutes published this week.

Recent price increases suggest inflationary expectations are reviving among consumers and prices will resume rising.

Oji Paper Co. will increase prices of paper for catalogues and books by 10 percent from July 1 because of higher costs of materials including wood chips, Hidehiko Aoyama, deputy head of Oji's printing paper division, said this week.

Taxi companies in Nagano and Oita prefectures raised fares by about 10 percent last month and taxi services in more than half of Japan's 90 operating districts are asking regulators for permission to increases fares.

Anecdotal Evidence

``The recent anecdotal evidence gives reason to expect gains in inflation in June or July,'' said Hiromichi Shirakawa, a former central bank official who's now chief economist at Credit Suisse in Tokyo. ``There's an argument that Japanese companies may not have room to keep cutting costs. That's why the risk to the CPI is to the upside.''

The bank should also watch how the revision of service prices in April or later will affect consumer prices, board members said. Businesses often review prices when Japan's fiscal year starts in April. The prices companies pay for services climbed 0.6 percent in March, the fastest pace in nine years.

``As in the U.S. and other developed countries, consumer price trends should be heavily dependent on services because prices of goods remain slack,'' said Tetsufumi Yamakawa, chief economist at Goldman Sachs Japan Co. in Tokyo., also a former BOJ official.

BOJ's Mizuno

Atsushi Mizuno, a central bank board member, told Jiji Press this week that a weaker yen and costlier materials are mounting pressure on companies to raise prices. A recovery in consumption makes it easier for households to accept price increases, he added, according to Jiji.

Consumer spending has risen in the past two quarters and may cushion the economy from slower growth in the U.S., Japan's largest market.

``Fears that core price declines may worsen are receding among consumers, and prices are gradually settling onto an upward trend,'' said Azusa Kato, an economist at BNP Paribas Securities in Tokyo, who expects prices to resume rising in the fourth quarter and the bank to raise rates in the same period.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: May 25, 2007 04:00 EDT

Japan's Consumer-Price Declines Slow to 0.1% (Update5)

By Mayumi Otsuma

May 25 (Bloomberg) -- Japan's consumer prices fell at a slower pace in April, signaling gains may soon resume, making it easier for the central bank to raise interest rates.

Core prices, which exclude fresh food, declined 0.1 percent from a year earlier, the statistics bureau said today in Tokyo, matching economists' estimates. The measure of inflation fell 0.3 percent in March, the steepest drop in two years.

Rising prices would shore up support for the Bank of Japan's policy of increasing its 0.5 percent benchmark interest rate, the lowest among major economies. Governor Toshihiko Fukui said last week that the bank could raise rates even with prices falling to prevent excessive investment and sustain growth.

``The improvement of consumer prices certainly provides relief and gives the BOJ's arguments some conviction,'' said Eishi Yokoyama, an economist at AIG Global Investment Corp. in Tokyo. ``We're going to see more speculation among investors about an early rate hike.''

The yen strengthened to 121.09 per dollar at 12:21 p.m. in Tokyo from 121.41 before the report was published, and to 162.55 per euro from 163.00. The yield on Japan's 10-year bond rose half a basis point to 1.7 percent.

Fukui has said prices will rise again once the effect of last year's gain in oil prices fades. The bank needs to increase the key rate as the economy expands and inflation gathers pace, he said.

End of Deflation

``The end of deflation is in sight,'' Economic and Fiscal Policy Minister Hiroko Ota said today. ``The risk that prices may keep falling remains, so we can't yet declare the end of deflation.''

Finance Minister Koji Omi said there was ``some improvement'' in prices last month. He said the central bank's policy should support economic growth.

April's decline in core consumer prices was the third straight monthly drop. Core prices in Tokyo, a harbinger of nationwide prices, were unchanged for a second month in May, also in line with economists' expectations.

Dubai crude, a benchmark for Asian refiners, traded at more than $70 a barrel last August, compared with around $67 today.

``The impact of last summer's oil price gains near records will linger over core prices for the time being, and they won't become positive until November,'' said Mitsumaru Kumagai, chief fixed-income strategist at Merrill Lynch & Co. in Tokyo.

IMF, OECD

Both the International Monetary Fund and the Organization for Economic Cooperation and Development yesterday urged the bank to keep rates on hold until prices ``firmly'' rise. The IMF said it's ``appropriate'' for the bank to gradually raise rates.

The bank needs to closely watch how companies pass recent increases in energy and raw material costs to consumers, some members of the policy board said at an April 9-10 meeting, according to minutes published this week.

Recent price increases suggest inflationary expectations are reviving among consumers and prices will resume rising.

Oji Paper Co. will increase prices of paper for catalogues and books by 10 percent from July 1 because of higher costs of materials including wood chips, Hidehiko Aoyama, deputy head of Oji's printing paper division, said this week.

Taxi companies in Nagano and Oita prefectures raised fares by about 10 percent last month and taxi services in more than half of Japan's 90 operating districts are asking regulators for permission to increases fares.

Anecdotal Evidence

``The recent anecdotal evidence gives reason to expect gains in inflation in June or July,'' said Hiromichi Shirakawa, a former central bank official who's now chief economist at Credit Suisse in Tokyo. ``There's an argument that Japanese companies may not have room to keep cutting costs. That's why the risk to the CPI is to the upside.''

The bank should also watch how the revision of service prices in April or later will affect consumer prices, board members said. Businesses often review prices when Japan's fiscal year starts in April. The prices companies pay for services climbed 0.6 percent in March, the fastest pace in nine years.

``As in the U.S. and other developed countries, consumer price trends should be heavily dependent on services because prices of goods remain slack,'' said Tetsufumi Yamakawa, chief economist at Goldman Sachs Japan Co. in Tokyo., also a former BOJ official.

BOJ's Mizuno

Atsushi Mizuno, a central bank board member, told Jiji Press this week that a weaker yen and costlier materials are mounting pressure on companies to raise prices. A recovery in consumption makes it easier for households to accept price increases, he added, according to Jiji.

Consumer spending has risen in the past two quarters and may cushion the economy from slower growth in the U.S., Japan's largest market.

``Fears that core price declines may worsen are receding among consumers, and prices are gradually settling onto an upward trend,'' said Azusa Kato, an economist at BNP Paribas Securities in Tokyo, who expects prices to resume rising in the fourth quarter and the bank to raise rates in the same period.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Japanese Stocks Gain; Banks Rise on Earnings Expectations

By Makiko Suzuki

May 22 (Bloomberg) -- Japanese stocks advanced, led by banks, after Sumitomo Mitsui Financial Group Inc. forecast profit will increase for this business year.

Sumitomo Mitsui climbed 3.8 percent after projecting a 22 percent increase in its net income for this business year. NEC Corp. jumped 7 percent, the biggest gain since Oct. 2005, after saying profit will triple this year.

``People are saying Sumitomo Mitsui's earnings forecast is still conservative and speculation over bigger profit growth in the industry pushed bank shares higher,'' said Katsunori Hirai, who helps oversee $20 billion in assets at Tokio Marine Asset Management Co. in Tokyo. ``Some investors started to buy technology shares on the expectation they will benefit from a possible recovery in the U.S. economy later this year.''

U.S. gross domestic product, the sum of all goods and services produced, rose at an annual rate of 1.3 percent in January through March, compared with a 2.5 percent gain the previous quarter and economists' estimate for 1.8 percent growth.

This month, the Reuters/University of Michigan preliminary index of sentiment rose unexpectedly to 88.7 from 87.1 in April.

The Nikkei 225 Stock Average added 100.79, or 0.6 percent, to 17,657.66 as of 10:56 a.m. in Tokyo. The broader Topix index rose 13.55, or 0.8 percent, to 1724.22.

Sumitomo Mitsui, Japan's third-largest bank by assets, climbed 40,000 yen, or 3.8 percent, to 1.1 million. Mizuho Financial Group, the country's No. 2, climbed 17,000 yen, or 2.2 percent, to 786,000. Mitsubishi UFJ Financial Group Inc., the nation's largest, rose 20,000 yen, or 1.5 percent, to 1.34 million.

NEC Climbs

Sumitomo Mitsui forecast profit will rise 22 percent to 540 billion yen ($4.45 billion) for the 12 months to March 2008.

Mizuho is scheduled to report earnings today after the market closes, followed by Mitsubishi UFJ tomorrow.

Among the companies that reported results yesterday, NEC, Japan's largest personal computer maker, climbed 41 yen, or 7 percent, to 630, the largest gain since Oct. 4, 2005. NEC said yesterday net income will increase to 30 billion yen in the 12 months ending March 31, exceeding the 9.1 billion yen a year earlier.

Other technology-related shares also advanced. Sony Corp., the world's biggest video-game maker, climbed 180 yen, or 2.6 percent, to 7,120. Sony said on May 16 its profit will more than double to a record this year. Canon Inc., the world's No. 1 digital camera maker, added 50 yen, or 0.7 percent, to 7,120. Canon reported a record first-quarter profit and raised its net income forecast on April 24.

Yamaha Corp., a maker of musical instruments, added 50 yen, or 1.9 percent, to 2,695 after saying it will sell 7.8 percent of Yamaha Motor Co., which produces motorcycles, for 63 billion yen and book a gain of 29 billion yen.

Three percent of Yamaha Motor will go to Mitsui & Co. today, and the rest will be sold to institutional investors through a brokerage later this month, Yamaha said yesterday after the market closed.

Takeda Pharmaceutical Co., Japan's biggest drugmaker, gained 110 yen, or 1.4 percent, to 7,860 after researchers said GlaxoSmithKline Plc's drug Avandia, the world's top-selling oral diabetes treatment, may raise a patient's chance of having a heart attack. Takeda sells similar product, Actos, that doesn't have a heart risk.

Nikkei futures expiring in June rose 0.6 percent to 17,670 in Osaka and advanced 0.6 percent to 17,665 in Singapore.

To contact the reporter for this story: Makiko Suzuki in Tokyo at Msuzuki13@bloomberg.net

Last Updated: May 21, 2007 22:00 EDT

Yen Declines to Record Low Against Euro; Yield Spread to Widen

By Aaron Pan and David McIntyre

May 16 (Bloomberg) -- The yen declined to a record low against the euro for a second day as signs of weaker economic growth suggest the Bank of Japan is unlikely to raise interest rates soon, spurring the so-called carry trade.

The yield advantage on German two-year notes over Japanese equivalents rose to the most in almost five years after reports showed yesterday Europe's economy grew more than expected and Japanese machinery orders fell. The yen has fallen versus 15 of the 16 most-traded currencies this year as investors borrow at Japan's 0.5 percent interest rate to seek higher returns abroad.

``There's no limit to euro-yen at the moment,'' said Ian Gunner, head of foreign-exchange research at Mellon Bank NA in London. ``The yen is going to get weaker and weaker because this yield story is still very much intact.''

The yen dropped to an all-time low of 163.86 per euro before trading at 163.81 at 7:11 a.m. in New York from 163.45 late yesterday. The currency could drop as low as 170 against the euro in the next six weeks, Gunner said. The yen also weakened to 120.45 per dollar from 120.27. The dollar was at $1.3599 per euro from $1.3591.

Japan's currency dropped for a fourth day versus the euro as the yield spread between German and Japanese two-year government bonds widened to 3.38 percentage points, the most since September 2002. The BOJ will keep rates unchanged at a two-day policy meeting starting today, according to all 49 economists surveyed by Bloomberg News.

Investors expect the ECB to raise its benchmark rate again after an increase to 4 percent in June, futures trading shows. The yield on the three-month Euribor contract for December was 4.42 percent. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB rate since the currency's start in 1999.

ECB Remarks

ECB council member Guy Quaden today said rates aren't hindering the euro-region's economic growth, De Tijd reported, citing an interview. Quaden, who is also head of the Belgian central bank, said the ECB will ``do what's necessary,'' according to the newspaper.

``The current exchange rate of the euro is less problematic than two or three years ago,'' he also said.

Council member and French central bank Chief Christian Noyer also said today in a speech in Mumbai that borrowing costs aren't slowing growth in the 13 countries that share the euro.

``It's clear we're going to get one more hike out of the ECB and, depending on what the euro does and how much more political pressure is put on, they are probably going to do two or three more,'' said Simon Derrick, chief currency strategist at Bank of New York in London. He forecasts the euro rising to 170 yen by September.

Carry Trades

The yen has fallen 16 percent against the euro in the past year as investors entered carry trades by borrowing Japan's currency to buy euro-denominated assets with higher yields.

Volatility on one-month euro-yen options stood at 6.78 percent, down from 7.20 percent a week ago. Lower volatility may encourage carry trades as it exposes bets to less currency risk.

Japan's currency two days ago fell to the lowest since 1990 against the New Zealand dollar and yesterday dropped to the weakest since 1992 against the Canadian dollar on speculation investors will increase carry trades.

New Zealand's currency last bought 88.81 yen, after reaching 89.06. Canada's dollar traded at 109.58 yen from as high as 109.82. Interest rates are 7.75 percent in New Zealand and 4.25 percent in Canada.

U.S. Housing Market

The dollar may fall for a fourth day against the euro before a report today that's forecast to show U.S. builders constructed new homes at a slower pace, suggesting the housing market may weigh on the economy. The Labor Department will say at 8:30 a.m. in Washington housing starts fell to an annual 1.48 million units in April, according to a Bloomberg News survey.

The dollar yesterday fell to an all-time low of 78.97 against the currencies of seven trading partners, according to a Fed index published on its Web site. The euro area has the heaviest weight in the index, followed by Canada, Japan, the U.K., Switzerland, Australia and Sweden.

The Fed's broad dollar index also dropped to 104.2, the lowest since July 1997. This index includes 26 currencies.

``The U.S. housing market seems not to have bottomed,'' said Shigeru Nakane, planning manager of the market trading office in Tokyo at Resona Bank Ltd., a unit of Japan's fourth-biggest lender. ``Amid the bearish sentiment, the dollar looks weak.'' The U.S. currency may fall to 119.80 yen today, he said.

Traders should place a stop-loss on a short dollar position at 120.60 yen, Nakane said. The dollar rose as high as 120.58 yen yesterday, the strongest since Feb. 27. A short is a bet on a decline.

To contact the reporter on this story: Aaron Pan in London at apan8@bloomberg.net ; David McIntyre in Sydney at dmcintyre2@bloomberg.net

Last Updated: May 16, 2007 07:19 EDT

Dollar Falls Versus Euro on Jobs Data After Four Days of Gains

May 4 (Bloomberg) -- The dollar fell against the euro after four days of gains and dropped from a two-month high versus the yen after a government report showed U.S. employers added the fewest jobs in more than two years.

The U.S. currency also weakened to an eight-month low against the Canadian dollar and declined versus the pound and Swiss franc on speculation the Labor Department data will increase the likelihood of a cut in borrowing costs by the Federal Reserve. Reports earlier this week showed pending home sales unexpectedly declined and inflation moderated in March.

``Growth and interest rate expectations are conspiring against the dollar,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York. ``A lower dollar is still the trend.''

The dollar fell 0.32 percent to $1.3593 per euro at 10:54 a.m. in New York. It touched a record low of $1.3681 on April 27. The dollar dropped 0.22 percent to 120.19 yen, falling from today and yesterday's high of 120.47. That was the strongest since Feb. 27, when stocks tumbled in a global rout.

The U.S. currency weakened 0.07 percent to 90.35 U.S. cents against its Canadian counterpart and touched 90.64 cents, the lowest since Sept. 1. The dollar declined 0.26 percent to $1.9919 per pound and 0.3 percent to 1.2106 Swiss francs.

The Australian dollar tumbled against all 16 major currencies today after the country's central bank cut its inflation forecast, weakening the case for increased borrowing costs. The currency dropped 0.42 percent to 82.05 U.S. cents.

Jobless Rate Rises

The U.S. unemployment rate rose to 4.5 percent from the five-year low of 4.4 percent as employers added 88,000 non-farm jobs in April, following a revised 177,000 the previous month, the Labor Department reported today in Washington. The median forecast of 85 economists surveyed by Bloomberg News was for a gain of 100,000.

``The market already factored in a lower number,'' said Brian Dolan, research director at Forex.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million funds under management. ``People shorted the dollar before the report.'' A short is a bet on a currency's decline.

Yields on interest-rate futures fell following the payroll report, indicating traders raised bets the Fed will lower borrowing costs this year.

The yield on Eurodollar futures for December declined to 5.075 percent from a two-week high of 5.105 percent yesterday. The contracts' value at settlement is based on the interest rate on three-month bank deposits, which is influenced by the federal funds rate target.

Benchmark Rates

The Fed has kept its target rate for overnight lending between banks at 5.25 percent since lifting it to that level in June. The European Central Bank has raised its rate seven times since November 2005 to 3.75 percent. The Bank of England's rate is 5.25 percent.

The payroll report pared the dollar's weekly gain against the euro, the first since March. The U.S. currency has risen 0.48 percent against the 13-country currency so far this week on reports showing strength in manufacturing and services.

The dollar may extend its decline next week on speculation the European Central Bank and the Bank of England will raise borrowing costs while the Fed holds them steady. All three central banks are scheduled to meet to set rates next week.

``We have an ECB that remains hawkish,'' said Simon Derrick, chief currency strategist in London at Bank of New York. ``The underlying force that continues to drive the euro higher is interest-rate differentials.''

ECB Outlook

UBS AG raised its forecast for the euro to $1.40 by the end of the year, saying it expects the ECB to increase its key rate to 4.75 percent by mid-2008. UBS's previous forecast was for the rate to peak at 4.25 percent this year.

The dollar has lost almost 3 percent against the euro and about 1.7 percent versus the pound since the start of the year.

The euro began its advance earlier today after a report showing a boost in European sales reinforced expectations the ECB will raise rates further this year.

``The business outlook continues to suggest that activity will at the very least remain firm over the coming months and provides a friendly backdrop for the expected ECB rate hike in June,'' said Stuart Bennett, a senior economist in London at Calyon.