The yen fell before a U.S. report today that may show the world’s largest economy shrank at a slower pace in the first quarter, reducing demand for the safety of the Japanese currency.
The dollar weakened against nine of the 16 most-active currencies on speculation Mexico’s government will contain the swine flu outbreak, limiting its impact on the faltering global economy.
Gains in the euro may be limited on concern disagreement is deepening among European Central Bank officials on steps needed to combat the recession. “Any signs the pace of contraction in the U.S. economy is easing will probably bolster investor confidence” in higher- yielding assets, said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington.
“This is likely to reduce ‘safe-haven’ demand for the dollar and the yen.” The yen declined to 127.32 per euro as of 8:52 a.m. in Singapore from 126.79 in New York yesterday. The Japanese currency also fell to 96.84 against the dollar from 96.45. The euro traded at $1.3148 from $1.3149 yesterday in New York.
Mexico’s peso was at 13.8206 per dollar from 13.8196 yesterday, when it declined to 14.1382, the weakest level since April 1. The currency plunged 5.1 percent on April 27 as the swine flu outbreak spread. The volume of currency trading is likely to be less than normal because of a national holiday in Japan, said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney.
U.S. Economy, Fed The U.S. economy probably contracted at an annual rate of 4.7 percent in the first quarter after shrinking 6.3 percent in the final three months of 2008, according to a Bloomberg News survey. The Commerce Department will release the report at 8:30 a.m. in Washington.
The Federal Reserve will keep its target lending rate in a range of zero to 0.25 percent, a separate Bloomberg survey showed. Policy makers will announce the decision on interest rates and goals for purchases of Treasuries and mortgage securities at 2:15 p.m. in Washington.
“The U.S. economy is not falling as fast as last year, which is a good thing,” said Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC, with $11.3 trillion in assets under custody. “Institutional investors have unwound long dollar positions even though they haven’t gone outright short. The market lacks direction at the moment.” A long position is a bet an asset will appreciate.
The dollar dropped yesterday against the euro on reduced demand for safety as the New York-based Conference Board said its consumer confidence index climbed to 39.2 this month, the highest level since November, from 26.9 in March. The gain in the index was the biggest since 2005.
‘Play Out’-“A slower rate of economic decline continues to play out,” said Andrew Busch, a global currency strategist at BMO Capital Markets in Chicago. “Risk is being put back on, and the euro rallied a bit.” The peso rose 1.7 percent versus the dollar yesterday, the most in a week, as Mexico City will close all 35,000 restaurants through May 5 to prevent the spread of the swine flu.
As many as 152 people have died in Mexico from flu-related causes, and the number of worldwide cases of the virus confirmed by laboratory tests reached 105, officials said. The spread of the swine flu beyond Mexico prompted the World Health Organization to increase its global pandemic alert to the highest since it adopted the warning system in 2005.
ECB Officials-The euro may weaken against the yen and the dollar on speculation discord is increasing among ECB policy makers over measures needed to counter the recession. ECB Executive Board member Lorenzo Bini Smaghi yesterday devoted much of his speech to highlighting the difficulties for the central bank of buying assets, suggesting he shares Bundesbank President Axel Weber’s view.
Weber has said he doesn’t favor cutting the benchmark rate below 1 percent and is against buying assets, while others such as Athanasios Orphanides of Cyprus don’t want to rule those options out. Fellow member Juergen Stark will speak today in Siegen, Germany, and Ewald Nowotny will speak in Vienna tomorrow.
Investors raised bets the ECB will cut its 1.25 percent target lending rate at its next meeting on May 7. The implied yield on the three-month Euribor interest-rate futures contract for June delivery fell to 1.280 percent yesterday from 1.295 percent on April 27.