By Yasuhiko Seki and Ron Harui Feb. 4 (Bloomberg) -- The yen and dollar strengthened against higher-yielding currencies on concern the Asia-Pacific region’s economic recovery may slow and European nations will struggle to reduce their deficits. Japan’s currency advanced versus 14 of its 16 major counterparts after reports today showed Australian retail sales unexpectedly shrank and New Zealand’s jobless rate rose to the highest level since 1999. The euro was near a seven-month low against the dollar on speculation the European Central Bank will refrain from ending emergency measures at a meeting today as Greece struggles to contain its deficit. “Emerging uncertainties about the Australian economy hurt sentiment toward higher-yielding currencies,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank. “Lingering sovereign woes in Europe also helped strengthen risk aversion.” The yen rose to 126.30 per euro as of 2:37 p.m. in Tokyo from 126.42 yesterday in New York. It gained 0.7 percent to 63.46 against New Zealand’s dollar, and climbed 0.2 percent to 80.15 versus the Australian currency. The greenback advanced 0.6 percent to 69.80 cents against the so-called kiwi and added 0.2 percent to 88.15 versus the Australian dollar. The U.S. dollar was at 90.92 yen from 90.98 yen in New York. The euro traded at $1.3891 from $1.3893. It dropped to $1.3853 on Feb. 1, the weakest level since July 8. Australian Sales Australian retail sales fell 0.7 percent in December from November, the Bureau of Statistics said in Sydney. Economists had forecast a gain. New Zealand’s unemployment rate climbed to 7.3 percent last quarter from 6.5 percent in the previous three months, Statistics New Zealand said. “It is quite a big miss on the monthly number and that’s probably going to give the Aussie a weaker tinge,” Greg Gibbs, a currency strategist with Royal Bank of Scotland Group Plc, said about the Australian sales data. “The U.S. dollar is generally looking firmer against other majors, and this is all shaping up for a bit of a wash-out of longs in the Aussie.” A long position is a bet a currency will advance. The MSCI Asia Pacific Index of shares fell 0.8 percent, ending two days of gains. The yen tends to strengthen during economic and financial turmoil because Japan’s trade surplus makes it less reliant on foreign capital. The dollar benefits from its role as the world’s reserve currency. The euro dropped for a second day against the Swiss franc on concern Greece and other European nations will face increasing difficulty in curbing their budget deficits. ‘Permanent Loss’ Greece’s largest union is set to approve its second strike this month, showing Prime Minister George Papandreou’s parliamentary majority may not be enough to implement his plan to cut the European Union’s widest deficit. Greece, Portugal and Spain have suffered a “permanent” decline in competitiveness since joining the euro, European Monetary Affairs Commissioner Joaquin Almunia said yesterday. “Almunia warned that Greece and Portugal have ‘quite big’ financing needs,” analysts led by Hans-Guenter Redeker, London- based global head of foreign-exchange strategy at BNP Paribas SA, wrote in a research note today. “The euro-dollar is on the edge of its next leg down.” The European Central Bank will keep its main interest rate unchanged at 1 percent after its meeting today, according to all 55 economists surveyed by Bloomberg. The euro weakened to 1.4706 franc from 1.4720. It dropped to 1.4636 on Jan. 29, the lowest level since March 10. Implied Volatility Implied volatility on one-month euro-dollar options rose to 10.6 percent from 10.4 percent in New York yesterday. Wider fluctuations increase the risk for carry trades, where money borrowed from countries with low rates is used to invest for higher yields. “Volatility is absolutely going to persist in the foreign- exchange market,” Monica Fan, a senior currency product engineer at State Street Global Advisors, said in a Bloomberg Television interview. “The market’s been hit by a series of micro-geopolitical event risks. Certainly investors are being forced to be much more nimble about the types of strategies they are undertaking.” To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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