By Ben Levisohn and Bo Nielsen Feb. 3 (Bloomberg) -- The yen declined against the euro and the dollar amid signs that the economic recovery is taking hold, fanning demand for higher-yielding currencies such as the South Korean won and the South African rand. The dollar gained against 11 of its 16 most-traded counterparts tracked by Bloomberg as a private report showed the U.S. economy cut fewer jobs than forecast last month. The euro gained for a third day against the dollar after European Union Monetary Affairs Commissioner Joaquin Almunia said the EU endorsed Greece’s deficit-cutting program. “Sentiment is largely being driven by the economic developments the market is watching,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “Traders are moving out of the yen a little bit and back into risk seeking positions.” The dollar gained 0.5 percent to 90.86 yen at 8:34 a.m. in New York, from 90.38 yesterday. It was at $1.3965 per euro, from $1.3965. The euro gained 0.5 percent to 126.82 yen. The MSCI World Index of equities rose 0.2 percent for a third day of gains, its longest winning streak in almost a month. Risk Appetite Companies in the U.S. cut 22,000 jobs in January, data from ADP Employer Services showed, compared with the median estimate in a Bloomberg News survey for a decline of 30,000. The one-month implied volatility of an option on the dollar against Brazil’s real, a popular trade when risk appetite rises, fell for the fourth day, dropping to 16.6 from 17.7 at the close on Jan. 28, the highest since Nov. 9, according to Bloomberg prices. Lower volatility makes the return on a trade less risky. “Both near-term concerns over the sustainability of the economic recovery and sovereign-default risk are overblown,” Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi UFJ Ltd., wrote today. “Global liquidity conditions remain loose and supportive for risk assets for now.” The yen will weaken to 130 per euro “in weeks,” Hardman said. The Institute for Supply Management’s index of non- manufacturing companies, which make up almost 90 percent of the U.S. economy, rose to 51 from 49.8 in December, according the median estimate of 75 economists surveyed by Bloomberg News. Readings above 50 signal growth. Pound Rises The pound advanced as much as 0.6 percent against the dollar after Nationwide Building Society said an index of consumer sentiment increased 3 points in January to 73, giving the Bank of England more reason to scale back measures to stimulate growth following a two-day policy meeting that ends tomorrow. “Speculation that some Bank of England policy makers will express a hawkish view on the economy and monetary policy is supporting the pound,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow in Tokyo. Britain returned to growth in the fourth quarter as house prices increased and unemployment began to decline, establishing a recovery in time for the election due by June. The Bank of England completed its 200 billion-pound ($325 billion) asset- purchase program on Jan. 26. Norway’s krone fell 0.3 percent to 8.1709 per euro after the nation’s central bank kept its benchmark interest rate unchanged, after raising it twice last quarter. The Oslo-based bank, which in October became Europe’s first to reverse an easing cycle since the credit crisis peaked, kept the overnight deposit rate at 1.75 percent, it said in a statement on its web site today. Krone ‘Attractive’ “The rates market is pricing around a 50 percent probability of a hike heading into this meeting,” Credit Suisse Group AG analysts led by London-based Sean Shepley wrote in a note to clients before the announcement. “Even if the Norges Bank keeps rates on hold this week, the krone continues to look attractive.” Investors should buy the krone against Sweden’s krona if it dips below 1.22 kronor, and buy the currency against the euro if it weakens beyond 8.2 per euro, the analysts wrote. The krone traded at 1.2381 against the krona, from 1.2389 yesterday. The gains in stocks worldwide may not be sustainable, according to Mohamed A. El-Erian, chief executive officer of Pacific Investment Management Co., which runs the world’s biggest mutual fund. Investors have wrongly priced in an “orderly” withdrawal of stimulus measures, a rebound in bank lending and coordinated government policy to restore growth, El-Erian wrote in a Bloomberg News column. That means Wall Street projections for gains in 2010 may be incorrect and prices will slump, he said. “Investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes,” El-Erian, 51, wrote. Greece Buoys Euro The Standard & Poor’s 500 Index fell 3.7 percent in January, more than any month since February 2009, after China set higher reserves for lenders and U.S. President Barack Obama proposed curbs on risk taking at banks. The euro rose for a third day versus the dollar after the European Commission approved Greece’s deficit-cutting program. Almunia said there is no need for Greece to seek outside help in dealing with its fiscal crisis. Greek Prime Minister George Papandreou yesterday pledged more action to tackle the deficit, including a freeze on state workers’ pay. Greece needs its measures to be backed by the International Monetary Fund, Nouriel Roubini and Arnab Das of Roubini Global Economics wrote in the Financial Times. A “credible austerity plan” for Greece should ideally be backed by a large IMF program to prevent a run on public debt and banks during the tough times ahead, they said. To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net.

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