Yen, Dollar Fall as Stock Gains on Earnings Pare Safety Demand

The yen and dollar weakened against most of their major counterparts as global stocks rose on speculation more corporate earnings will beat expectations, damping demand for the safest assets.

Japan’s currency slid for a third day against the euro after Intel Corp.’s revenue forecast exceeded analysts’ estimates following better-than-expected earnings yesterday at Goldman Sachs Group Inc. and Johnson & Johnson. The pound advanced to the highest level versus the dollar in almost two weeks on the smallest increase in U.K. jobless claims in a year.

“A number of key players with better-than-expected earnings eased the risk backdrop,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank by assets. “The market snapped back on the positive news.”

The yen declined 0.9 percent to 131.76 per euro at 9:34 a.m. in New York, from 130.62 yesterday. The dollar slid 0.9 percent to $1.4088 per euro from $1.3967 and touched $1.4102, the weakest level since July 2. The yen was little changed at 93.7 versus the dollar, compared with 93.50.

A JPMorgan Chase & Co. gauge showed implied volatility on options for major exchange rates fell to 13.59 percent in a third day of decreases. Reduced volatility indicates less probability of currency fluctuations that may erode profit on investments in higher-yielding assets.

The dollar fell 1.3 percent to 8.158 South African rand and the yen declined 1.3 percent to 12.02 versus the Swedish krona as the Standard & Poor’s 500 Index advanced 1 percent, encouraging risk demand.

Benchmark Rates

The target lending rates of 7.5 percent in South Africa and 0.25 percent in Sweden compare with as low as zero in the U.S. The Bank of Japan kept its target interest rate at 0.1 percent at the end of a two-day policy meeting today.

Intel, the world’s largest chipmaker, rose 7.1 percent in U.S. trading after it forecast quarterly revenue will reach as much as $8.9 billion. JPMorgan and International Business Machines Corp. are among other companies in the S&P 500 due to report results this week.

“There is a sense that optimism-driven trading is re- emerging,” said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s third-largest banking group. “The forecast-beating results from Goldman Sachs and Intel suggest the yen will weaken and stocks will advance.”

U.S. Output

U.S. factory production decreased 0.4 percent in June after a revised 1.2 percent drop in previous month, the Federal Reserve reported today. The median forecast of 73 economists surveyed by Bloomberg News was for a reduction of 0.6 percent.

The Empire factory index, a measure of production in the New York region, fell 0.6 percent in July after sliding 9.4 percent in the previous month, the New York Fed said. Readings below zero signal a contraction. The median forecast of 53 economists surveyed by Bloomberg News was for a 5 percent drop.

The pound rose against the dollar as the U.K. report on jobless claims last month indicated the worst of the recession may be over.

Sterling’s 18 percent drop versus the dollar in the past year has been overdone and investors should buy the currency to prepare for a “steep” economic recovery, according to Stephen Jen, managing director of macro and currencies at BlueGold Capital Management LLP in London.

‘Bearish’ on Pound

“A lot of people seem to be bearish on the pound at the moment because it’s so easy to tell a U.K.-negative story,” Jen said in an interview yesterday. “The country has a very aggressive monetary policy and a cheap currency. And it’s underowned.”

Britain’s currency will have to appreciate to about $1.75 to reflect the U.K.’s economic potential, he said. Sterling increased as much as 1 percent to $1.6467, the highest level since July 2.

China’s foreign-exchange reserves topped $2 trillion for the first time in a sign of the difficulty the nation faces in finding places to invest. The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People’s Bank of China said on its Web site. That compares with a $7.7 billion gain in the previous three-month period.

The South Korean won rose for a second day, climbing 1.2 percent to 1,278.35 per dollar, while the Indonesian rupiah advanced 0.9 percent to 10,122 and Malaysia’s ringgit climbed 0.5 percent to 3.5652.

The Bank of Japan forecast that the world’s second-largest economy will shrink 3.4 percent in the year ending March 2010, more than the 3.1 percent predicted in April. That would outstrip last fiscal year’s 3.3 percent contraction as the worst in the postwar era. The central bank extended its emergency- credit programs to Dec. 31 from Sept. 30.