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Bloomberg

The yen strengthened after falling to a seven-year low against the dollar as demand for safer assets revived following a report that showed Japan’s economy unexpectedly sank into a recession.

Japan’s currency climbed from the weakest level since October 2008 versus the euro as the nation’s stocks slumped and a gauge of momentum used by some traders signaled the yen was poised to rally. New Zealand’s dollar advanced for a fifth day after retail sales increased more than economists predicted. The Australian currency climbed to the strongest this month as the nation signed a free-trade agreement with China.

“This pretty much nails the tax-hike delay but stocks are looking shaky after the contraction in the economy,” said Minori Uchida, head of global markets research at Bank of Tokyo- Mitsubishi UFJ Ltd. in Tokyo. “We could see 117 yen become a short-term peak” for the dollar, he said.

The yen strengthened 0.2 percent to 116.12 per dollar at 8:17 a.m. London time after earlier sliding to 117.05, the weakest level since October 2007. Japan’s currency gained 0.2 percent to 145.40 per euro after depreciating to 146.53. The dollar was little changed at $1.2523 per euro.

Japan’s economy shrank an annualized 1.6 percent in the third quarter, after contracting a revised 7.3 percent in the previous three months. Economists surveyed by Bloomberg News predicted an expansion of 2.2 percent. Etsuro Honda, an aide to Prime Minister Shinzo Abe, has said proceeding with another tax increase next year would be out of the question if growth is less than 3.8 percent.

‘Overwhelmingly Negative’

“It is an overwhelmingly negative report and certainly confirms the market’s idea that the sales tax will be pushed back,” said Raiko Shareef, a markets analyst at Bank of New Zealand Ltd. in Wellington. “The dollar has come quite a long way in a long time. There are some solid offers there at 117 yen,” he said.

The yen also rallied as its 14-day relative strength index against both the dollar and euro remained below the 30 level, that some traders see as an indicator the currency is poised to strengthen. The Topix index of shares dropped 2.5 percent.

Abe will hold a news conference tomorrow to express his intention to delay the sales-tax increase and dissolve the lower house, Yomiuri newspaper reported, without saying who provided the information.

The yen has tumbled around 6 percent against the dollar since Oct. 30 after the Bank of Japan surprised investors the following day with further currency-depreciating stimulus and the government announced pension reforms that allow more money to flow abroad.

‘Dollar’s Failure’

The dollar weakened as Westpac Banking Corp. said traders are starting to see positive economic surprises as a chance to sell the U.S. currency.

Wagers by hedge funds and other large speculators on the greenback’s strength versus eight of its major peers exceeded bets it will weaken by a record 372,558 on Nov. 11, according to the Washington-based Commodity Futures Trading Commission.

“The U.S. dollar’s failure to sustain rallies on decent economic data is definitely a warning sign for the dollar bull,” said Sean Callow, a currency strategist at Westpac in Sydney.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was little changed at 1,092.78 after declining 0.2 percent on Nov. 14.

Kiwi Advances

The kiwi rose against all but one of its 16 major peers after Statistics New Zealand said retail sales increased 1.5 percent in the third quarter. Economists surveyed by Bloomberg predicted a gain of 0.8 percent.

The New Zealand dollar jumped 0.4 percent to 79.37 U.S. cents after reaching 79.75 cents, the strongest since Oct. 29.

A U.S.-kiwi exchange rate in the “mid-to-high 70s” is sustainable for the economy to help moderate business cycles, New Zealand Finance Minister Bill English said yesterday in an interview with Bloomberg Television in Brisbane.

Australia’s dollar rose for a fifth day after the nation completed a free trade deal with China, cementing ties with its biggest economic partner and reducing its reliance on resource exports.

The Aussie gained 0.1 percent to 87.61 U.S. cents after advancing to 87.96 cents, the highest since Oct. 31.