Yen Rises to 2010 High Against Dollar on Global Slowdown Signs (bloomberg.com)

July 30 (Bloomberg) -- The yen rose to the strongest level this year against the dollar and gained for a third day versus the euro as signs the global recovery is losing momentum boosted demand for Japan’s currency as a refuge.

The yen advanced against all its 16 major counterparts before a U.S. report forecast to show growth in the world’s biggest economy slowed last quarter and after Japanese data showed industrial production unexpectedly fell and the jobless rate increased. The dollar headed for its biggest monthly drop versus the euro since May 2009 after Federal Reserve Bank of St. Louis President James Bullard said the U.S. is moving closer to Japanese-style deflation.

“We are moving into a more risk-averse environment globally,” said Simon Derrick, chief foreign-exchange strategist in London at Bank of New York Mellon Corp. “There are a lot of deflationary stories out there at the moment and we see people turning toward the relative safe-haven currencies like the yen.”

The yen appreciated to 86.29 per dollar as of 9:53 a.m. in London from 86.79 in New York yesterday, after reaching 86.18, the strongest since Dec. 1. The yen has advanced 2.6 percent against the dollar this month. Japan’s currency rose 0.9 percent to 112.54 per euro. The dollar was at $1.3024 per euro from $1.3079, sliding 6.1 percent in July.

‘Main Theme’

U.S. economic growth slowed to a 2.6 percent annual rate last quarter, from 2.7 percent in the first, according to a Bloomberg survey before today’s Commerce Department report. Japan’s factoryoutput slid 1.5 percent in June from May, when it gained 0.1 percent, the government said today. The jobless rate rose to 5.3 percent, the highest since November, the statistics bureau said.

“The dollar is being sold due to negative U.S. fundamentals, which is the market’s main theme right now,” said Toshihiko Sakai, head of trading for currencies and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., Japan’s largest financial group. “As a result, the yen is appreciating against cross currencies. I won’t be surprised to see the yen advance further against the dollar.”

Bullard said yesterday the Fed should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep interest rates near zero. Fed Chairman Ben S. Bernanke on July 21 said central bankers “remain prepared” to act as needed to aid growth even as they get ready to eventually raise interest rates.

Deflation Risk

“The comments from Bullard and from Bernanke last week do indicate an increasing risk that there is some shift in tone to the FOMC statement coming up on August 10,” Derek Halpenny, European head of foreign exchange at Bank of Tokyo-Mitsubishi UFJ in London, wrote in a note to clients today. That is “the clear driver of dollar weakness to date and this will frustrate government officials in Tokyo who appear to be becoming increasingly concerned over the appreciation of the yen.”

Lawmakers from the ruling Democratic Party of Japan today pressed Prime Minister Naoto Kan to shift the focus of his economic policy to growth from fiscal restraint and urge the central bank to do more to tackle deflation.

The Swiss franc rose 0.2 percent to 1.0391 per dollar as the MSCI World Index of global stocks fell 0.3 percent, the third daily decline.

Interest-rate futures on the Chicago Board of Trade show a 53 percent chance the Fed will keep the target lending rate unchanged through March, up from 43 percent odds a month ago...

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