Dollar Heads for Weekly Gain as Data Show Economy Strengthening

Dollar Heads for Weekly Gain as Data Show Economy Strengthening

By David McIntyre and Stanley White

May 4 (Bloomberg) -- The dollar headed for the biggest weekly gain in four months against the euro as strength in U.S. manufacturing and services suggested the Federal Reserve will refrain from cutting interest rates in coming months.

The dollar also was set for a second winning week versus the yen, to the strongest since February, as the yield spread between U.S. and Japanese two-year bonds widened to a three-week high. The U.S. Institute for Supply Management's index of services grew the fastest in three months in April, while manufacturing was the best in almost a year.

``The data don't support the idea the economy is falling into a hole, pricing out the possibility of the Fed cutting rates,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``The yield differential has moved in the dollar's favor.''

The U.S. currency was poised for its first weekly gain in six against the euro, rising to the strongest since April 17 at $1.3536, before trading at $1.3545 at 6 a.m. in London. The dollar bought 120.31 yen and touched 120.47, the highest since Feb. 27. It rose 0.6 percent from 119.63 yen in New York last week.

The dollar index, measuring its value against six major currencies, climbed 0.56 percent this week, the most in two months. The four-day rally was the longest this year. Trading may be subdued in Asia due to holidays in Japan and China.

The yield premium on U.S. two-year Treasuries over similar- maturity Japanese bonds was 3.84 percentage points, the widest since April 16. It was 3.79 percentage points last week. The Fed's 5.25 percent benchmark rate compares with 0.5 percent for the Bank of Japan, 3.75 percent for the European Central Bank and 6.25 percent for the Reserve Bank of Australia.

Fed Futures

The dollar yesterday rose for a fourth day as the ISM's index of non-manufacturing businesses increased to 56 from 52.4 in March. Readings above 50 point to growth in services such as banking, retailing and construction, which make up almost 90 percent of the U.S. economy.

Interest-rate futures show 17.5 percent odds the Fed will lower borrowing costs in August, down from 22.5 percent a week earlier. Futures indicate any reduction in rates isn't likely until December, when a quarter-percentage point cut is fully priced in.

The yen headed for a second weekly gain against the Australian dollar after the Reserve Bank of Australia lowered its 2007 inflation forecast to 2.5 percent from 2.75 percent, weakening the case for a rate increase.

Unwinding Carry Trades

Australia's dollar had the biggest drop among the 16 most- active currencies as investors may exit carry trades involving borrowing yen to buy higher-yielding assets.

``The RBA may not hike this year,'' said Lee Wai Tuck, a currency strategist at Forecast Singapore Ltd. ``This may spur some unwinding of Australian dollar-yen carry trades.''

Australia's currency slipped the most in two weeks, to 98.54 yen from 99.23 yesterday. It may fall to 98.30, Lee said.

The euro, another beneficiary of yen carry trades, headed for its first weekly loss in nine. It was last quoted at 162.93 yen, down 0.2 percent from 163.27 last week.

The dollar may draw added support as improving economic data suggest a report on the U.S. labor market may beat expectations.

The U.S. economy created 100,000 new jobs in April, slower than the 180,000 jobs added in the previous month, according to the median estimate of 85 economists surveyed by Bloomberg before a government report due at 8:30 a.m. in Washington.

``We have an above-consensus expectation for a 115,000 increase, which would add to the sense that U.S. data are holding firm,'' said Sue Trinh, currency strategist at RBC Capital Markets in Sydney. ``We no longer expect the Fed to cut rates this year. This is absolutely supportive for the dollar,'' which may rise to 121.50 yen and $1.35 per euro today.

Put Up Rates

The euro may trim losses against the dollar on speculation reports on European services and retail sales today will reinforce expectations the central bank will raise rates further this year.

Royal Bank of Scotland Group Plc's services index rose to 57.6 in April, the fastest pace in three months, from 57.4 in March, a Bloomberg survey shows. Retail sales in the 13 nations that share the euro grew 2.3 percent in March after rising 1.2 percent in February, a separate survey shows.

``In Europe, the view is the economy is getting stronger and stronger,'' said Michael Thomas, head of economics and strategy at ICAP Australia Ltd. in Sydney. ``The Europeans are just about to put up rates again. The euro is probably heading back up'' to $1.3700 and 165.77 yen next week, he said.

Interest-rate futures indicate investors anticipate the ECB will increase borrowing costs twice more this year. The yield on the December contract was 4.375 percent yesterday, above 4.355 percent a week earlier.

The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB's benchmark since 1999.

To contact the reporter on this story: David McIntyre in Sydney at dmcintyre2@bloomberg.net ; Stanley White in Tokyo at swhite28@bloomberg.net .

Last Updated: May 4, 2007 01:04 EDT

Japan's Stocks Decline, Led by Sony, on U.S. Consumer Spending

By Makiko Suzuki

May 1 (Bloomberg) -- Japanese stocks fell, led by Sony Corp. and Honda Motor Co., after figures showed personal spending slowed in the U.S., hurting demand in Japan's biggest overseas market.

Sumitomo Mitsui Financial Group Inc., the country's third- biggest lender by assets, led banks lower after saying profit was worse than it forecast.

``We see a mixed picture for the U.S. economy and investors reacted to the slowing consumer spending by selling exporters,'' said Hideyuki Ookoshi, who oversees $365 million at Chiba-Gin Asset Management Co. in Tokyo. ``Japan's major banks need more time to recover as loan demand and profit margins remain small.''

Chubu Electric Power Co. and Tokyo Electric Power Co. led falls by utility companies after reporting declines in profit.

The Nikkei 225 Stock Average slid 157.11, or 0.9 percent, to 17,243.30 at the 11 a.m. break in Tokyo. The broader Topix index lost 8.29, or 0.5 percent, to 1692.71. Gauges that track technology-related companies and automakers such as Sony and Honda accounted for a third of the Topix's fall.

Australia's S&P/ASX 200 Index slipped 0.1 percent, Indonesia's Jakarta Composite index lost 0.2 percent and New Zealand's NZX 50 Index fell 0.2 percent. All other markets in the region are closed today for public holidays.

Sony, the world's largest maker of game consoles, dropped 100 yen, or 1.6 percent, to 6,320. Honda, Japan's No. 2 automaker by sales, fell 50 yen, or 1.2 percent, to 4,080.

The U.S. was the largest overseas market for Sony in the year ended March 2006, as Honda made more than half of its sales in North America.

Slowing Spending

U.S. stocks fell after the Commerce Department said consumer spending slowed in March, gaining 0.3 percent from the previous month. That was less than a revised 0.7 percent increase in February and falling short of the average economist estimate of 0.5 percent.

The report said a price gauge tied to spending patterns that excludes food and energy costs was unchanged in March from a month earlier. Economists forecast a 0.1 percent.

Sumitomo Mitsui Financial declined 30,000 yen, or 2.9 percent, to 1.02 million. Mitsubishi UFJ Financial Group Inc., Japan's biggest lender by assets, lost 10,000 yen, or 0.8 percent, to 1.24 million.

Sumitomo said its full-year profit fell 36 percent from a year earlier, worse than its forecast, due to losses incurred in bond trading and provisions for its investment in consumer lender unit Promise Co.

Net income was 440 billion yen ($3.7 billion) in the year ended March 31, the bank said on April 27 in a preliminary earnings statement. That was less than its previous forecast of 570 billion yen.

Utility Shares Fall

Chubu Electric, Japan's third-biggest utility, fell 130 yen, or 3.4 percent, to 3,720 after reporting its annual net income dropped 24 percent to 90.6 billion yen. Tokyo Electric, the nation's biggest power utility, lost 30 yen, or 0.8 percent, to 3,950. Its net income for the three months ended March 31 slumped 67 percent from a year earlier to 43.3 billion yen.

Ibiden Co., an integrated circuit package maker, slid 340 yen, or 5 percent, to 6,510. The company, which had a 78 percent jump in its full-year net income last business year, forecast its profit will fall 8.9 percent to 44 billion yen this year.

Alpine Electronics Inc., a maker of car audio equipment, tumbled 119 yen, or 6 percent, to 1,853 after saying it expects a 13 percent fall in net income this business year.

Trading companies including Mitsui & Co. and Sumitomo Corp. advanced after forecasting record profits for this year.

Mitsui, Japan's second-biggest trading company, advanced 30 yen, or 1.4 percent, to 2,185. Sumitomo, the third largest, rose 20 yen, or 1 percent, to 2,085.

Japan's five biggest trading companies, including Mitsui and Sumitomo, expect profits to surpass last year's records as rising global demand may keep prices of metals and oil near their peaks.

Nikkei futures expiring in June fell 0.9 percent to 17,250 in Osaka and lost 0.7 percent to 17,245 in Singapore.

To contact the reporter for this story: Makiko Suzuki in Tokyo at msuzuki13@bloomberg.net .

Last Updated: April 30, 2007 23:14 EDT

Markets on a tear; Dow 13,000 in sight

Wall Street faces a second big week of earnings, housing data

Updated: 3:53 p.m. ET April 22, 2007

NEW YORK - The Dow Jones industrial average is now perched below the 13,000 mark, lifted last week by surprisingly strong earnings reports. If this week’s reports follow that trend, investors may send the index hurtling past that milestone.

So far, 16 of the 30 Dow component companies have released earnings from the first three months of the year, and 10 have beaten expectations. This week, six more Dow components report results, including Exxon Mobil Corp., which in 2006 posted the largest annual profit by a U.S. company, and Microsoft Corp., which investors will be eyeing for clues about the potential of the technology sector.

But while the Dow is back in record territory, and the Standard & Poor’s 500 and Nasdaq composite indexes are at their highest levels in more than six years, many market watchers are skeptical about Wall Street’s ability to extend last week’s streak with the same vigor. Volatility remains higher than it was before the stock plunge on Feb. 27 that sent the Dow tumbling 416 points, and although the market has recovered its losses, many of the same concerns that took the market down two months ago remain: high inflation, a weakening dollar and a slow housing market.

Investors will have a good deal of housing data to examine this week. Recently, reports have shown that the housing market is still tepid, but more resilient than many investors expected, suggesting that the troubles with subprime mortgages aren’t affecting the broader lending industry, and that homeowners won’t feel the need to rein in spending.

On Tuesday, the National Association of Realtors reports sales of existing homes in March. The market expects that 6.50 million existing homes were sold, down slightly from 6.69 million in February, according to the median forecast of economists surveyed by Thomson Financial. Also Tuesday, Standard & Poor’s releases its February index of home prices.

On Wednesday, the Commerce Department reports on new home sales in March. Economists predict that 851,000 new homes were sold in March, compared with 848,000 a month earlier.

Last week, benign inflation data also helped stocks surge. The Dow rose 2.77 percent, the S&P 500 rose 2.17 percent, and the Nasdaq rose 1.38 percent.

Another week of earnings
AT&T Inc. releases its earnings from the first quarter Tuesday. Analysts surveyed by Thomson expect the company to report profit of 61 cents per share. The phone company closed at $39.87 Friday, at the upper end of its 52-week range of $24.72 to $39.90.

Boeing Co.’s quarterly earnings come out Wednesday, and analysts expect the aerospace manufacturer to report profit of $1.02 per share. Boeing closed at $93.29 last Friday, at the high end of its 52-week range of $72.13 to $94.75.

Apple Inc.’s results also come out Wednesday and are expected to show quarterly profit of 64 cents per share. Apple closed at $90.97 Friday, at the upper end of its 52-week range of $50.16 to $97.80.

Thursday will bring Microsoft’s and ExxonMobil’s earnings. Microsoft’s profit is expected to be 46 cents per share. The software maker closed at $29.02 Friday, in the upper half of its 52-week range of $21.45 to $31.48.

ExxonMobil is expected to post a profit of $1.51 per share. The oil company closed at $79.86 Friday and set a fresh 52-week high of $79.80. Its previous high was $79.

Economic data rolls in
On Tuesday, the Conference Board releases its April index of consumer confidence. The market expects the index to slip to 105.7 from 107.2 in March, according to the median forecast of economists surveyed by Thomson Financial.

On Wednesday, the Commerce Department reports on orders of durable goods. Economists forecast that durable goods rose 1.1 percent in March, slightly faster than 1.0 percent in February.

Also Wednesday, the Federal Reserve releases its Beige Book, which details economic activity in various U.S. regions.

On Friday, the University of Michigan revises its index of consumer sentiment in April, and the Commerce Department releases its first estimate of first-quarter gross domestic product. Economists are anticipating GDP growth of about 2.0 percent, down from 2.5 percent in the fourth quarter.

Next week will also bring regional manufacturing indexes from the Chicago, Richmond and Kansas City Federal Reserve banks, and a speech in New York on Friday from San Francisco Fed President Janet Yellen.

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The Dow Jones industrial average closed above 12,800 for the first time Wednesday

NEW YORK - The Dow Jones industrial average closed above 12,800 for the first time Wednesday, signaling Wall Street's recovery from its steep decline in February as investors rewarded companies with strong earnings.

The day was not a standout for the overall market, however. Technology stocks lagged following disappointing earnings from leaders including Yahoo Inc. (Nasdaq:YHOO - news)

The Dow moved as high as 12,838.46 before slipping back slightly to close at 12,803.84, up 30.80, or 0.24 percent. The Dow broke records set on Feb. 20, one week before the average tumbled 416 points in a worldwide selloff.

As only 11 of the 30 stocks in the blue chip index advanced, the Dow's gain Wednesday came from strength in stocks like JP Morgan Chase & Co., Boeing Co. and Caterpillar Inc.

JPMorgan lifted the Dow after the bank reported a 55 percent jump in profits that far surpassed Wall Street's expectations. The companies that make up the Dow — nearly half of which report earnings this week — have been mostly beating the Street's predictions.

Broader stock indicators finished mixed. The Standard & Poor's 500 index rose 1.02, or 0.07 percent, to 1,472.50, but the Nasdaq composite index fell 6.45, or 0.26 percent, to 2,510.50.

Bond prices rose for the third straight session as investors grew optimistic that the
Federal Reserve won't raise interest rates. The yield on the benchmark 10-year Treasury note fell to 4.66 percent from 4.69 percent late Tuesday. Gold prices also advanced.

Investors pulled back from tech stocks after Yahoo posted a surprising 11 percent drop in its first-quarter profit. Disappointing results from International Business Machines Corp. and Motorola Inc. added to the selling.

Mike Malone, a trading analyst at Cowen & Co., said results from Yahoo stunted some of the market's appetite for technology issues. However, he dismissed the notion that Yahoo's earnings marked the start of a trend for first-quarter reports.

"There have been some company-specific issues out there, but they really aren't indicative of the underlying earnings environment," he said.

Wall Street was uneasy about a sharp drop in the dollar, which is now at 26-year lows against the British pound and a two-year low against the euro. The U.S. currency has weakened because interest rates have remained steady since the summer and amid signs of a slowing U.S. economy.

Light, sweet crude settled up 3 cents at $63.13 per barrel on the New York Mercantile Exchange as a government report showed a bigger-than-expected decline in gasoline inventories. The U.S. Energy Information Administration said stockpiles dropped 2.7 million barrels to 197 million barrels.

Charlie White, chief investment officer of the ThomasLloyd Funds, said that while overall earnings have been good, investors appear to still be waiting further signs about where the economy is headed.

"It's one of these periods of time that you don't have any compelling evidence either way and what you need to do is stay focused and be patient," he said. "I ask myself the question, 'Is this the beginning of a leg up in a bull market, or is this a last gasp?'"

Investors are focused on earnings reports as they look for a direction in stocks. S&P has predicted earnings for companies in the S&P 500 grew less than 4 percent in the first quarter, much less than in previous quarters.

Yahoo plunged $3.78, or 11.8 percent, to $28.31 after the Internet portal reported disappointing results late Tuesday. The results left Wall Street wondering how much longer it will take the company to regain its financial footing after it stumbled through most of 2006.

Pressure was felt elsewhere in the tech sector. IBM posted disappointing results late Tuesday, and its shares dropped $2.32, or 2.4 percent, to $94.80. Hard driver maker Seagate Technology LLC fell 85 cents, or 3.8 percent, to $21.30 after it reported profit fell 22 percent in the first quarter, and lowered its forecast.

Motorola reported a first-quarter loss due to sluggish sales, and charges to cover a legal settlement and restructuring efforts. However, sales surpassed expectations and the stock rose 27 cents to $18.22.

Medical device maker Abbott Laboratories Inc. fell 97 cents to $58.03 after it said its first-quarter profit fell 19 percent. The results excluding certain items, however, beat analyst estimates.

JPMorgan rose $1.89, or 3.8 percent, to $52.07 after the nation's third-largest bank reported a 55 percent increase in profits. The New York-based bank said first-quarter results were boosted by strength across its primary business lines, though it did increase reserves to offset subprime mortgage losses.

Declining issues led advancers 9 to 7 on the
New York Stock Exchange, where consolidated volume came to 2.93 billion shares compared with volume of 2.89 billion shares traded Tuesday.

The Russell 2000 index of smaller companies fell 4.58, or 0.55 percent, to 824.38.

Overseas, Japan's Nikkei stock average closed up 0.80 percent. Britain's FTSE 100 finished down 0.74 percent, Germany's DAX index fell 0.90 percent, and France's CAC-40 dropped 0.38 percent.

South Korean and Australian stocks hit new records Wednesday, while the sometimes-volatile Shanghai Composite index edged up 0.01 percent. It was a nearly 9 percent drop in the Shanghai Composite index on Feb. 27 that helped trigger the day's global selloff. Indexes like the Shanghai Composite, however, took less time to resume hitting highs than did major U.S. indexes.

___

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

Japan's Savers May Be Ready to Spend, Keeping Economy Growing

Japan's Savers May Be Ready to Spend, Keeping Economy Growing

By Jason Clenfield

April 16 (Bloomberg) -- Hiroko Kobayashi, a 65-year-old grandmother from Nagoya, Japan, says she's starting to feel a little more comfortable about spending now that the bank pays her more interest.

``If I can earn a little money on my savings, it'll mean I can go out and get a few things for my grandkids,'' she says.

Japan's penny-pinching savers and earnest salarymen may at last be ready to loosen their purse strings as bank deposits earn more and millions of workers collect retirement windfalls. Economists forecast consumer spending will accelerate this year as demand awakens in the world's second-largest economy after a decade of deflation and stagnant wages.

Japan needs the boost to keep its economy growing as demand from the U.S. wanes, says Hiroshi Shiraishi, an economist at Lehman Brothers Japan Inc. in Tokyo. ``If the U.S. slowdown is moderate, household spending will gradually firm up and it'll be enough to keep the economy growing at the current pace,'' he says.

The World Bank says consumer spending will help Japan's economy expand at a 2.3 percent rate this year, up from 2.2 percent in 2006. Growth is picking up even after Japanese manufacturers cut production in January and February because of reduced demand from the U.S. and elsewhere in Asia.

Vindication for Fukui

Sustained growth would vindicate Bank of Japan Governor Toshihiko Fukui's policy of raising the benchmark overnight rate, currently 0.5 percent, from near zero last year. It might also provide a welcome boost for Prime Minister Shinzo Abe's shaky government, which is facing its first parliamentary elections in July.

The Japanese consumer has so far proven an elusive target. Previous predictions of a spending spree, most recently last year, turned out to be premature: Consumer spending rose 0.9 percent in 2006, the slowest in three years, and was flat in the second half of the year.

Some are still skeptical. ``I'm not entirely convinced that strong consumer spending can be taken for granted'' because the savings habit is so deeply ingrained, says Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``There are good reasons to be optimistic this year about consumer spending, but I remain cautious because of the risk of a rebound in savings rates.''

Rising Spending

Still, household spending rose in January and February after falling every month last year. Demand for services reached a record in January and department-store sales rose in February at the fastest pace in almost a year.

``The latest round of data has offered encouragement that the recovery is finally filtering down to households,'' says David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

Mitsubishi UFJ Financial Group Inc., Japan's biggest bank, is now paying 0.2 percent on regular savings accounts, up from 0.001 percent before the Bank of Japan raised rates in July. Takuji Aida, chief economist at Barclays Capital in Tokyo, says higher rates may generate as much as 1.5 trillion yen ($12.6 billion) in household interest income.

Interest and dividend income this year will boost private consumption by 1 percentage point, according to Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. and a former Bank of Japan official.

New Retirees

Payments to new retirees this year may contribute another 0.2 percentage point to spending growth, according to Takashi Omori, chief economist with UBS Securities Japan.

Over the next three years, 6.9 million people born in Japan's post-World War II baby boom reach the retirement age of 60. The Cabinet Office estimates that lump-sum payments to this year's retirees, in addition to their pensions, will total about 9 trillion yen. That works out to an average of 17.5 million yen, or about $147,000, per person, according to UBS Securities Japan Ltd. in Tokyo.

Aeon Co., Japan's largest retailer, has its sights on the wave of retirees. Aeon last month started a promotion to encourage them to use some of the windfall to spruce up their wardrobes. The ``re-fresh-man campaign'' offers discounts on blazers and sportswear to customers who trade in their old business suits. ``Response has been a lot better than we expected,'' says Aeon spokesman Takeshi Kodama.

The Japanese workers reaching retirement age over the next three years represent 5.4 percent of the population, and have assets totaling 130 trillion yen, almost 10 percent of all personal financial holdings, according to Dai-ichi Life Research Institute Inc.

Sashimi or Steak

New retirees ``are going to change how they spend their money,'' says Aeon's Kodama. ``They're going to do things like take trips and treat themselves to nice meals at home. We expect them to buy travel gear or sports equipment, and to splurge on a better cut of sashimi or steak.''

Economists say the retirements of the next few years may help set the stage for a lasting improvement in consumer spending by opening more full-time job opportunities for younger Japanese, giving them more money to spend.

In the decade after Japan's asset bubble burst, companies replaced full-time employees with part-time workers, whose pay averages less than half that of regular employees, according to Atsushi Seike, professor of labor economics at Tokyo's Keio University and a member of the government's labor policy council.

From 1997 to 2005, average pay fell about 10 percent, labor ministry reports show; one in three workers held a part-time or temporary position last year, compared with one in five a decade earlier.

Toyota's Plans

Still, the number of full-time employees grew last year for the first time since 2003, and indications are the trend is continuing. Toyota Motor Co., Japan's third-largest private employer, plans to increase its domestic new hires 11 percent to 3,500 people in fiscal 2008. Fast Retailing Co., Japan's largest clothing chain, will more than double its full-time workforce in the next year.

``Employers realize the cuts to their regular workforces were excessive,'' Seike says. ``We're seeing an adjustment.''

As the employment picture improves, Japan's consumers may change their savings habits too. The savings rate may come down to about 13 percent of disposable income this year from almost 16 percent at the end of 2006, says Jesper Koll, chief Japan economist at Merrill Lynch & Co. in Tokyo. ``Consumer demand is the key economic dynamic in Japan from here forward,'' he says.

For Kobayashi, the Nagoya grandmother, the calculation is simpler. ``I'm an old lady and my only income is a pension,'' she says, and anything that gives her more money to spend ``is a good thing.''

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

Yen May Fall to Low Against Euro as G-7 Doesn't Comment on Drop

Yen May Fall to Low Against Euro as G-7 Doesn't Comment on Drop

By Bo Nielsen and Min Zeng

April 14 (Bloomberg) -- The yen may weaken to a record low against the euro after officials from the Group of Seven industrial nations stopped short of saying that the Japanese currency's weakness is a threat to the global economy.

The official statement concluding the G-7 meeting in Washington yesterday said the group will keep monitoring exchange rates ``closely.'' The statement omitted a reference to the yen. The yen fell against 14 of the 16 most active currencies before the gathering ended.

``This basically gives a green light for people to continue selling the yen,'' said Michael Woolfolk, a senior currency strategist at the Bank of New York in New York. He said the yen may drop to 165 per euro by the end of the second quarter.

The yen fell 1.1 percent this week to 161.31 per euro from 159.53 on April 6 and touched 161.43, a record low. The Japanese currency traded almost unchanged at 119.26 per dollar from 119.25 last week. The dollar fell to $1.3527 per euro from $1.3379 per euro on April 6 and reached $1.3554 per euro, the weakest in more than two years.

The euro has strengthened six consecutive weeks versus the yen, the most since December. The common currency received a boost on April 12 when European Central Bank President Jean- Claude Trichet signaled policy makers will continue to increase borrowing costs this year.

Carry Trade

The communiqué resembled the one released after the Feb. 10 meeting in Essen, Germany, urging investors to recognize that Japan's economic recovery is ``on track.''

That message failed to persuade investors to curb borrowing in the yen to invest in higher-yielding assets overseas, a practice known as the carry trade weighing on the yen. Two weeks after the meeting the Japanese currency had weakened 1 percent to an all-time low versus the euro.

International Monetary Fund Chief Economist Simon Johnson said in Washington on April 11 that the carry trade in which investors borrow in low-yielding countries to invest in higher- yielding assets elsewhere isn't necessarily destabilizing for financial markets.

The Japanese economy is expected to grow 2.4 percent this year, up from 1.4 percent last year, according to the median forecast of 12 economists surveyed by Bloomberg. Consumer prices fell 0.3 percent in February, according to government reports, reducing the argument for the Bank of Japan to lift interest rates from 0.5 percent, the lowest among major economies.

Interest Rate Futures

``The carry trades will continue and the yen will continue to weaken,'' said Robert Houck, chief currency trader with Wells Fargo Bank in Minneapolis. Houck said the yen may fall to 167 against the euro over the next four to six weeks.

The ECB's benchmark borrowing costs are 3.75 percent and the Federal Reserve's 5.25 percent, unchanged since June.

Trichet led traders to speculate that rate increases are likely in the months ahead saying borrowing costs are ``accommodative'' to growth in remarks on April 13. The bank left borrowing costs unchanged at 3.75 percent that day.

Traders pushed the yield on the September interest-rate futures contract to 4.28 percent from 4.22 percent on April 5, suggesting they expect the ECB to raise borrowing costs two times by then. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points, or 0.16 percentage point, above the ECB's benchmark rate since 1999.

``I'm not sure what would hold the euro back,'' said Thierry Elias, head of currency trading in New York at Natexis Banques Populaires. Elias said the euro may strengthen to 164 versus the yen.

Accelerating Growth

Bets on an increase in the euro outnumbered wagers on a stronger dollar by a record 104,394 on April 10, figures from the Washington-based Commodity Futures Trading Commission showed. The euro gained 1.1 percent versus the dollar, the most in a month.

The euro region's economy will grow 2.3 percent this year, beating the 2.2 percent estimate for the U.S., the International Monetary Fund said in its semiannual World Economic Outlook released April 11 in Washington.

The spread between the 10-year German Bund yielding 4.22 percent and the comparable-maturity Treasury narrowed 12 basis points to 0.54 percent this week, the lowest more than two years.

The New Zealand dollar was the best performer against the euro and the U.S. dollar among the 16 most active currencies this week. The currency gained 2.34 percent versus the dollar to 73.73 touching 73.83 cents versus the New Zealand dollar, the lowest since May, 2005. The dollar reached 83.36 cents against the Australian dollar, the lowest since Oct. 1990.

Chinese Yuan

U.S. Treasury Secretary Henry M. Paulson said following the G-7 meeting that it was ``crucial'' for the Chinese yuan to have more flexibility ``now.''

The G-7 statement said it was ``desirable'' for the yuan to ``move.'' The yuan's weakness has been blamed for the growth in the ballooning U.S. trade balance and fueled protectionist pressures within the Congress. The U.S. imposed duties on imports of Chinese coated paper last month. Last year the current account deficit, the broadest measure of trade, was a record $856.7 billion or 6.5 percent of gross domestic product.

The yuan's movements are restricted by the Chinese authorities.

To contact the reporter on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net ; Min Zeng in New York at mzeng2@bloomberg.net

Last Updated: April 13, 2007 22:37 EDT