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Euro Declines as Volatility Low Boosts Carry Trade; Krona Slides

June 9 (Bloomberg) -- The euro fell for a second day versus the dollar as a report showed investor confidence declined and as record-low foreign-exchange volatility boosted demand for higher-yielding assets.

The 18-nation common currency dropped against 13 of its 16 major counterparts. The yen fell to its weakest level in almost a month against the Australian dollar after the lower price swings emboldened traders to seek profits by exploiting differences in interest rates. Sweden’s krona slipped amid bets the Riksbank will come under pressure to cut interest rates after Deputy Governor Karolina Ekholm said last week that the nation faces deflation risks.

“The euro has become one of those low-yielding currencies that you sell on a carry-trade basis or use as a funder,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “That’s true particularly if you contemplate the diverging monetary policy stance with Europe and the U.S.”

The euro slipped 0.2 percent to $1.3611 as of 8:13 a.m. New York time after dropping to $1.3503 on June 5, the lowest since Feb. 6. The shared currency weakened 0.3 percent to 139.43 yen. The dollar was little changed at 102.44 yen.

ECB Action

An index measuring sentiment in the euro area declined to 8.5 in June from 12.8 in May, Sentix research institute said today. Economists had predicted an increase to 13.3, according to a Bloomberg News survey.

The euro slipped to a four-month low last week as the ECB on June 5 became the first major central bank to charge fees on deposits and unveiled other plans to support an economy threatened by deflation. Policy makers led by President Mario Draghi cut the deposit rate to minus 0.1 percent, lowered the main refinancing rate to a record 0.15 percent and announced measures including targeted long-term loans.

JPMorgan Chase & Co.’s Global FX Volatility Index fell to 5.71 percent, down from as much as 27 percent in October 2008, after Lehman Brothers Holdings Inc.’s collapse froze credit markets amid the worst financial crisis since the Great Depression. Lower volatility increases the appeal of a strategy of borrowing in currencies with low interest rates and investing in a higher-yielding currency, known as the carry trade.

Yen Declines

The yen slipped against higher yielding peers as the nation recorded a current-account surplus of 187.4 billion yen in April that was smaller than economists predicted.

“Japan’s trade position has deteriorated markedly in recent years and that’s something we continue to see as a negative factor for the yen,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “This low-volatility environment is encouraging investors to rebuild carry trades so that is a potential negative for the yen.”

The yen tumbled 6.1 percent in the past year, the worst performer after the Canadian dollar among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The euro gained 2.6 percent, while the U.S. dollar declined 0.8 percent.

Sweden’s krona declined against all its 16 major peers, sliding 0.4 percent to 9.0799 versus the euro. It depreciated 0.6 percent to 6.6705 per dollar.

An inflation rate hovering near zero is not helpful and avoiding a deflationary state is a key policy objective for the central bank, Ekholm said at a conference in Oslo on June 6, the day after the ECB cut rates.

‘Adds Pressure’

“A softer ECB last week adds pressure on the Riksbank to cut rates in July, which might add to bets for a weaker krona,” said Karl Steiner, a foreign-exchange strategist at SEB AB in Stockholm. “The krona strengthened to make it overvalued against the euro on Friday when Swedish fixed-income markets were closed” for a holiday, he said.

The Aussie rose 0.3 percent to 93.56 U.S. cents and touched 93.64 cents, the strongest level since May 19. New Zealand’s dollar advanced 0.1 percent to 85.11 U.S. cents. Australia’s financial markets are closed today for a holiday.

Morgan Stanley raised its forecast for the Aussie, citing an increase in global demand for higher-yielding assets.

“The main driver of our bullish stance is our expectation that global demand for high-yielding AAA paper will result in further strong inflows to Australia,” Geoffrey Kendrick, Morgan Stanley’s head of Asia currency and interest-rate strategy in Hong Kong, wrote in a research note. “It’s Japanese buyers that are returning.”

Most Bullish

Morgan Stanley’s forecast is the most bullish among about 50 active estimates compiled by Bloomberg. The median is for the currency to weaken to 89 U.S. cents by Dec. 31.

The Australian and New Zealand currencies rallied after Chinese data released yesterday showed exports from Asia’s biggest economy increased 7 percent in May versus a year earlier, the fastest pace since January.

South Korea’s won advanced amid speculation the ECB’s decision last week to boost monetary easing and a U.S. report showing employers added jobs last month will underpin demand for assets tied to growth.

“The ECB actions may increase flows to emerging markets while the U.S. employment figures back a brighter economic outlook, supporting a stronger won,” said Jahng Won, a currency dealer at Shinhan Bank in Seoul. “There will be caution against intervention by South Korea’s authorities as the won strengthens.”

The won gained 0.4 percent from June 5 to 1,016.14 per dollar, the strongest since August 2008. Korean financial markets were shut on June 6 for a holiday.

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