By Ron Harui and Yoshiaki Nohara Oct. 16 (Bloomberg) -- The yen headed for a second weekly loss versus the euro as optimism the global economic recovery is strengthening spurred demand for higher-yielding assets. The yen weakened against 14 of its 16 major counterparts before a report forecast to show U.S. industrial output improved for a third month. The dollar fell against Australia’s currency amid speculation of further rate increases in the South Pacific nation. The pound gained for the first week in a month versus the greenback on bets the Bank of England will suspend asset purchases, easing concern it’s flooding the market with sterling. “U.S. data are reinforcing the path for an economic recovery,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Risk-taking appetite is improving, so the bias is for the yen and the dollar to be sold as funding currencies and resource-rich currencies to be bought.” The yen touched 136.03 per euro, its lowest level since Aug. 24, and traded at 135.66 per euro as of 6:03 a.m. in London from 135.35 in New York yesterday. The currency slid to as low as 90.99 per dollar, the weakest since Sept. 25, and was at 90.89 from 90.55. The yen dropped to 83.85 per Australian dollar from 83.36. It earlier touched 84.22, the weakest since October 2008. The dollar fetched $1.4924 per euro from $1.4947 in New York yesterday, when it declined to $1.4968, the lowest since Aug. 13, 2008. The U.S. currency declined to $1.6350 versus the pound from $1.6268. It earlier touched $1.6400, the weakest since Sept. 23. Dollar Index The Dollar Index was poised for a second weekly decline as economists surveyed by Bloomberg News said the Federal Reserve will report today that U.S. industrial output rose 0.2 percent in September after gaining 0.8 percent in August. Manufacturing in the New York region expanded in October for a third-straight month, the Federal Reserve Bank of New York said yesterday. Its general economic index rose to 34.6 from 18.9 in September, according to the bank. Readings above zero for the Empire State index signal manufacturing is growing. The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro and the yen, declined to 75.466. The dollar dropped to 92.22 cents per Australian dollar from 92.05 cents. It touched 92.70 cents, the weakest since August 2008. Benchmark interest rates are 3.25 percent in Australia and 1 percent in the euro zone, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors seeking higher returns. The risk in such trades is that currency market moves will erase profits. Bank of England The pound gained for a fourth day against the dollar after the Financial Times reported that Bank of England Markets Director Paul Fisher said policy makers would be more likely to suspend quantitative easing. Policy makers would be more likely to pause asset purchases, giving themselves the option of “doing more later,” rather than stopping them, Fisher said according to the Financial Times. Rising asset prices and improved confidence may be signs the program is working, Deputy Governor Charles Bean said this week. “The Fisher remarks surprised the markets when everyone was extremely short the pound, causing massive covering of those positions,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. Ltd. in Tokyo. “BOE policy makers may be hinting they’ll interrupt their bond-buying program. The U.K. currency could be bought further.” A short position is a bet an asset will decline. Asset Purchases The yen gained 6.4 percent versus the pound since the end of July on speculation the U.K. would extend asset purchases. The Bank of England pledged last week to stick to its plan to buy 175 billion pounds ($286 billion) of bonds to cement Britain’s recovery from the worst recession in a generation. The pound rose to 148.76 yen, the strongest level since Sept. 24, before trading at 148.69 yen from 147.32 yen from yesterday. The dollar reversed losses against the euro after the European currency’s 14-day stochastic oscillator rose to 91.9 today from 69.1 a week earlier, above the 80 threshold that signals the euro may have risen too quickly and is poised to weaken. “Technical indicators show the dollar was being oversold,” said Yoh Nihei, trading group manager at Tokai Tokyo Securities Co. in Tokyo. “Investors are adjusting their positions, buying back the currency.” In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. ECB Measures The euro still headed for a second weekly gain against the dollar amid speculation European Central Bank officials will today signal a withdrawal of unconventional policy measures intended to combat the recession. ECB council member Axel Weber said it’s time consider raising interest rates and ending emergency liquidity programs. “Given the stabilization of the economic situation and financial markets, the time has come to consider how to further manage the crisis,” Weber said in a speech yesterday in Muenster, Germany. Weber is scheduled to speak again today in Muenster. “ECB officials are starting to signal exit strategies as stocks gain and corporate earnings improve,” said Takeshi Tokita, vice president of foreign exchange sales at Mizuho Corporate Bank Ltd. in Tokyo. “The market is taking that as a positive sign, benefiting higher-yielding currencies such as the euro.” To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

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