Yen Drops On Signs Higher Oil Prices Are Eroding Japanese Trade Surplus

(Bloomberg) -- The yen fell to a one-week low against the dollar and dropped versus the euro on concern high oil prices are eroding Japan's trade surplus.
Crude oil's 50 percent increase over the past year is hurting Japan's trade balance because the country imports almost all its oil. A government report today showed Japan recorded a trade deficit in the first 20 days of August, the first since May. The surplus for the entire month of May was the smallest in more than three years, reducing the amount of dollars and other foreign currency Japan's exporters need to sell for yen.
``The broader picture for the yen's decline is down to the continued deterioration in Japan's trade surplus,'' said Derek Halpenny, a currency strategist at the Bank of Tokyo Mitsubishi Ltd. in London, a unit of Japan's second-largest lender.
The yen weakened to 110.53 per dollar as of 5 p.m. in New York from 110.10 late yesterday, according to electronic currency dealing system EBS. Japan's currency fell to 137.01 per euro from 136.71.
Crude oil rose to a record $70.85 per barrel on Aug. 30. Crude futures for delivery this year were at $64.67 today, tempering yen losses.
``Probably the impact of oil is weighing on the yen more than anything,'' said Jeffrey Young, head of currency research in New York at Citigroup Inc. ``The potential impact of oil has inhibited upside against the dollar and has kept the yen softer against other'' currencies, he said.
A separate report showed Japan's companies cut orders for machinery in July, after the biggest gain in seven months in June. Orders fell 4.3 percent after a jump of 11.1 percent in June, the Cabinet Office said in Tokyo today.
Federal Reserve
The dollar also benefited as speculation ebbs that the Federal Reserve will pause in its interest rate increases after Hurricane Katrina, the costliest natural disaster in U.S. history. The dollar erased losses from earlier today, rising to $1.2399 per euro.
``It's starting to appear that the Fed will continue to tighten and that bodes well for the dollar,'' said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products Corp. in Wilton, Connecticut. ``We've seen the low in the dollar in the last week.''
The Fed's need to keep raising rates is ``not as obvious as it was, though it remains a ``probably scenario,'' San Francisco Fed President Janet Yellen said today in the text of a speech in San Diego. She doesn't vote on policy this year.
Fed Bank of Chicago President Michael Moskow said yesterday that rising inflation pressures need to be countered by ``appropriate'' rate increases.
The U.S. central bank has lifted its target rate for overnight loans between banks 10 times since June last year to 3.5 percent. The dollar fell 2 percent against the euro last week as traders bet the Fed was approaching the end of its rate increases.
`Too Dovish' Market
``The market has got itself into a far-too-dovish spot given the tone of the Fed-speak,'' said Steve Pearson, chief currency strategist at HBOS Plc in London. ``There is potential for rate expectations to rebuild and that should support the dollar.''
The yield on the September federal fund futures contract was 3.585 percent, showing traders see an almost 95 percent chance the Fed will raise its rate to 3.75 percent this month.
Earlier today, the euro rose against the dollar as well as the yen amid signs Germany's economy, Europe's largest, is picking up.
German Reports
German exports, which kept the economy expanding last year, rose for a second month in three, the government said today. An economic indicator published today by the Frankfurter Allgemeine Zeitung newspaper rose the most in almost a decade.
``From a very low base the German data has been performing very strongly, confidence is up and activity is up,'' said Adam Myers, a currency strategist at UBS AG in London. ``The euro will continue to benefit.''
Reports in the past week have shown increases in German industrial production, factory orders and retail sales along with a decline in unemployment, suggesting growth is recovering from a second-quarter slowdown.
The yen's decline may be limited by speculation that Prime Minister Junichiro Koizumi wins re-election on Sept. 11. Koizumi is seeking a mandate to accelerate spending cuts to spur economic growth, which would help the currency.
Yen-Euro Strategy
JPMorgan Chase & Co. said the yen could advance against the euro if Koizumi wins and German Chancellor Gerhard Schroeder holds off a challenge in elections on Sept. 18 from the opposition Christian Democratic Union, which is promising welfare cuts and a loosening of labor laws.
``Euro-yen is likely to be the focus of knee-jerk trading with a modest sell-off likely if Germany rejects reform while Japan embraces Koizumi's reform version a week earlier,'' wrote Paul Meggyesi, a currency strategist at the firm in London in a report on Sept. 6.
Support for Schroeder's Social Democrats rose in a poll, the second poll in two days to show a similar result. Schroeder's party gained 2 percentage points from last week to 34 percent, the Infratest poll of 1,000 voters for ARD television found. Voters were polled on Sept. 6 and 7.
``It's going to weigh on the euro,'' said Ian Stannard, a currency strategist at BNP Paribas SA. ``One of the things that has been helping the euro in the past few weeks has been the prospect of a more pro-reform government in Germany. If it looks like it's going down the wire, the market might start to get a bit nervous.''

To contact the reporter on this story:
Steve Rothwell at srothwell@bloomberg.net