The Yen Weakens as the dollar gains and Japan's trade deficit widens

The yen fell against the dollar after a government report showed Japan’s trade deficit widened to the most in more than two decades, diminishing the appeal of the currency. Japan’s currency declined against the euro as the data added to a government report last week that showed the world’s second-biggest economy shrank the most since the 1974 oil shock. The dollar may strengthen against the euro after President Barack Obama said the U.S. will emerge from its slump “stronger than before.” “The safe haven of the yen is in crisis due to the ongoing recession and the trade surplus that has become a deficit,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, a unit of France’s Credit Agricole SA. “Everyone is pessimistic about Japan and that’s really negative for the yen.” The USD/JPY is currently trading at 96.88 as of 8:40am, GMT.

European Union officials are concerned that the pound’s slide to a record low against the euro could destabilize the British economy, according to a document prepared last month by European Commission and EU finance ministry officials. The pounds “very rapid” drop “raises questions about the financial stability of the British economy,” said the document, which was prepared ahead of the Feb. 14th Group of Seven meeting in Rome. The currency’s weakness “is a source of concern for the euro area.” The report contradicts Prime Minister Gordon Brown’s argument on Feb. 13 that a weaker currency helps rather than hinders the economy. With the pound down 18 percent against the euro in the past year, it also underscores investors’ concern about Britain’s fiscal health as the government racks up debt to fund bank bailouts. The GBP/USD is currently trading $1.2860 as of 8:50am, GMT.

Federal Reserve Chairman Ben S. Bernanke spurned outright federal control of U.S. banks in favor of a public-private partnership that the government would eventually exit. Bernanke told lawmakers yesterday the government would use supervision instead of shareholder control to guide major banks, and warned against dismantling their franchises. The remarks eased concern Treasury Secretary Timothy Geithner’s financial plan would push aside private shareholders, and spurred the biggest gain in financial shares in a month. Bernanke said at the Senate Banking Committee hearing yesterday: “I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary.” The EUR/USD is currently trading at $1.2855 as of 9:10am, GMT.

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