Yen, Dollar Advance as Stock Losses Revive Demand for Safety

Tokyo - The yen rose the most in a week against the euro, and the dollar strengthened as renewed concern the U.S. financial crisis will linger sent Asian shares lower and revived demand for safer assets.

Japan’s currency gained versus all 16 major counterparts after Atlanta-based SunTrust Banks Inc. said U.S. financial institutions may report more credit losses as commercial real estate falters. Australia’s dollar snapped a five-day advance against the greenback as crude oil, the nation’s fourth-most valuable commodity export, declined and damped demand for higher-yielding securities.

“The main driver for currencies is still the movement of risky assets and now we’re going to get more movements that will be unfavorable because there is uncertainty as to what will happen in China,” said David Deddouche, a foreign exchange strategist at Societe Generale SA in Paris. “The market is starting to react to comments like SunTrust’s about commercial real estate.”

The yen strengthened 0.4 percent to 134.78 per euro as of 9:10 a.m. in London, from 135.27 yesterday in New York. It climbed 0.2 percent to 94.38 per dollar from 94.56. The U.S. currency was at $1.4282 per euro, from $1.4304, and advanced to $1.6372 versus the pound, from $1.6417.

Australia’s dollar slipped to 83.81 U.S. cents from 83.89 cents in New York yesterday, when it touched 84.29 cents, the most since Aug. 14 and near its highest level this year. Crude oil for October delivery dropped 0.7 percent to $73.87 a barrel.

‘Succumbing to Optimism’

Chinese stocks, the world’s worst performers this month, extended declines after Premier Wen Jiabao said the economy faces “ many uncertainties.” The MSCI World Index of stocks fell 0.3 percent and the Shanghai Composite Index sank as much as 5.7 percent.

European Central Bank Governing Council Member Yves Mersch warned against “succumbing to optimism” about the economy, Luxembourg’s Wort reported, citing an interview

U.S. stocks yesterday erased gains after SunTrust, Georgia’s biggest bank, said commercial real estate may falter through 2010.

“The industry is a long way from declaring any sort of victory, especially regarding credit issues,” SunTrust Chief Executive Officer James Wells III said yesterday. “This credit cycle has yet to play itself out. We do not expect things to improve for the banking industry in the very near future.”

The Chicago Board Options Exchange Volatility Index, or VIX, rose 0.5 percent to 25.14 yesterday, signaling investor skepticism about the sustainability of the recovery.

As anxiety about the health of the U.S. financial system resurfaces, “Asian stocks will probably fall,” said Tomokazu Matsufuji, a dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc. “There is a good chance that the yen and dollar will rebound from yesterday’s losses.”

Bank Failures

The U.S. Dollar Index, a six-currency gauge of the greenback’s value, was little changed after Taylor, Bean & Whitaker Mortgage Corp., the 12th-largest U.S. mortgage lender, filed yesterday for bankruptcy protection from creditors as regulators question its involvement with Colonial BancGroup Inc. The Dollar Index traded at 78.287, from 78.220 yesterday.

Another 150 to 200 U.S. banks may fail in the current banking crisis and the industry’s payments to keep the Federal Deposit Insurance Corp. afloat could eat up 25 percent of pretax income in 2010, Reuters reported, citing banking analyst Richard Bove of Rochdale Securities.

Signs of Recovery

Losses in the euro may be tempered before the Ifo institute’s report tomorrow on German business confidence that is forecast to rise for a fifth month, adding to signs that the recession in the 16-nation region is abating.

ECB President Jean-Claude Trichet said on Aug. 22 there are “some signs confirming that the real economy is starting to get out of the period of freefall.”John Lipsky, first deputy managing director at the International Monetary Fund, wrote yesterday on the agency’s Web site the global economy is showing “clear” signs of a rebound.

“The euro-zone economy looks like it’s heading for a recovery,” said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Corp. in Tokyo. “The euro will probably strengthen further.”

The ECB will keep its main refinancing rate at 1 percent for the rest of this year, according to the median estimate of 22 analysts surveyed by Bloomberg News.

The pound traded near a 11-week low against the euro on speculation a U.K. report this week will show house prices rose at a slower pace in August, supporting the case for the Bank of England to keep borrowing costs low.

The average cost of a British home climbed 0.5 percent this month after a 1.3 percent gain in July, according to a Bloomberg News survey of economists. Nationwide Building Society will release the report on Aug. 27.

Mortgage Fraud

“There are a lot of problems still inherent in the U.K. economy,” Kathy Lien, head of foreign-exchange research at GFT Forex, an online currency-trading firm in New York, said in a Bloomberg Television interview. “It’s going to be a continued drag on the British pound.”

U.K. mortgage lenders may face further losses from fraud totaling hundreds of millions of pounds, the Financial Times reported, citing fraud experts. Simon Bevan, BDO Stoy Hayward’s national lead partner in charge of fraud services, said mortgage fraud rose to 197 million pounds in the first half of this year, from 13.4 million pounds in 2008, the newspaper said.

The Bank of England on Aug. 6 increased its bond purchase program by 50 billion pounds to 175 billion pounds to help revive economic growth. The central bank will leave its benchmark rate at 0.50 percent until the end of this year, a Bloomberg survey showed.

U.K. mortgage approvals rose in July to the highest level since February 2008, the British Bankers’ Association said today. Loan approvals for home purchases were 38,181, compared with 35,564 in June, the organization said in a statement in London.

The U.K. currency traded at 87.23 pence per euro, from 87.11 pence yesterday.