By Yasuhiko Seki Feb. 16 (Bloomberg) -- The yen fell against higher-yielding currencies on prospects deflation will prompt the Bank of Japan to maintain credit easing programs for an extended period. The Australian dollar rose for a second day against the yen as the central bank said in minutes of its February meeting that further increases to its benchmark interest rate were likely if the economy improves. The Bank of Japan will start tomorrow a two-day policy board meeting where it is forecast to leave its key interest rate at 0.1 percent. The euro snapped a four-day decline versus the dollar amid speculation the 16-nation currency’s loss was overdone. “While overseas central banks are flagging an exit from credit easing, the Bank of Japan is nowhere near,” said Hiroshi Maeba, deputy general manager of foreign-exchange trading in Tokyo at Nomura Securities Co., Japan’s biggest securities broker. “Given the yield disadvantage in Japan, it would not be a surprise if the yen weakened further.” The yen fell to 122.53 per euro as of 6:16 a.m. in London from 122.38 yesterday in New York. The Japanese currency traded at 89.79 per dollar from 90.02. The euro climbed to $1.3645 from $1.3598. The European currency reached $1.3532 on Feb. 12, the lowest since May 19. Australia’s currency strengthened to 89.35 U.S. cents from 88.84 cents. The Aussie advanced to 80.23 yen from 79.97 yen. Benchmark interest rates are 3.75 percent in Australia and 2.5 percent in New Zealand, attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits. RBA Minutes The Australian dollar reached the highest this month against the greenback after the central bank said its decision to keep interest rates unchanged this month was “finely balanced” amid concern European sovereign risks may weaken the global recovery. The Reserve Bank of Australia will increase its target rate by 1 percentage point this year, according to a Bloomberg News survey. Reserve Bank of Australia Governor Glenn Stevens was the first central banker in the world to raise borrowing costs three times last year, taking the cash rate target to 3.75 percent in December from 3 percent at the start of October. Japan Deflation The yen weakened against 10 of the 16 most-traded counterparts on speculation deflation will prompt the Bank of Japan to keep its benchmark rate unchanged through this year, according to a Bloomberg News survey of economists. A report yesterday showed that a broad measure of prices fell the most in more than half a century, and economists including Takahide Kiuchi say the bank may be compelled to add credit to the economy later this year. “Deflation is deepening, so the government may resume pressure on the BOJ to fight deflation in the months ahead,” said Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “There’s a chance for a further action by the BOJ if the yen strengthens and stocks slump again.” The Japanese currency extended the past week’s declines against the Australian and New Zealand dollars as Bank of Japan Governor Masaaki Shirakawa said the central bank will maintain a very accommodative financial environment. The policy board is always prepared to add liquidity to the economy, Shirakawa said in parliament in Tokyo today. The central bank will act decisively if financial markets are volatile, the governor said. The euro advanced against 11 of its 16 major counterparts on speculation the currency’s 5.2 percent drop against the euro over the past month was too rapid. Euro Rebounds “The euro has been sold quite a lot, so short-term players may want to unwind some huge short positions,” said Tomohiro Nishida, a foreign-currency dealer at Chuo Mitsui Trust & Banking Co. “This may cause a brief rebound in the euro.” A short position is a bet that an asset’s price will decline. The euro’s 14-day relative strength index, or RSI, stayed below 30 for a third day, a sign the currency may be poised to rebound after dropping too fast. Gains in the euro were tempered on speculation that sovereign debt problems will hamper a recovery in the euro-zone, as European leaders refused to detail how they would rescue debt-laden Greece if it fails to finance its debt. “The market has been a little disappointed with the lack of progress to date, so we need something reasonably definitive in terms of support for Greece,” said Mike Jones, a currency strategist in Wellington at Bank of New Zealand Ltd. To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

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