Power Shares US Dollar Index Bullish (UUP)

[btrain]

Safe-Haven Currencies Get Boost From Japan Crisis


By Javier E. David
Of DOW JONES NEWSWIRES


- Investors dump higher-yielding assets on Japan nuclear fears

- Panicked investors flock to franc, while dollar taps bid

- If yen ceases to be safe haven, Norwegian krone could gain


NEW YORK (Dow Jones)--Earthquake and tsunami-ravaged Japan is now confronting the increasing possibility of nuclear irradiation, sparking a rally in traditional safe-harbor currencies as investors abandon higher-yielding assets at breakneck speed.

Four days after the world's third-largest economy was rocked by one of the worst temblors in its history, global markets plummeted on fears that an evolving nuclear crisis will ripple across the world's economy. Japanese officials are racing against time to contain the fallout from the troubled Fukushima Daiichi nuclear plant, which has spiked radiation levels across the country.

Panicked investors have flocked to the Swiss franc, which surged to a record high against the dollar and pushed the euro more than 1% lower on the day. Despite loose monetary policy that has recently undermined the dollar and favored the euro and pound, the U.S. currency has also benefited from safe-harbor buying.

"There's only one story today: anything [investors] bought previously they're selling, and anything they sold they're buying back," quipped Marc Chandler, global head of foreign exchange at Brown Brothers Harriman in New York. He added that fears of nuclear radiation emanating from Japan "could be a big hit on the global economy."

As a result, risk-related currencies that had previously profited from surging oil prices and expectations of higher interest rates, such as the Swedish krona and the Canadian dollar, are now being jettisoned in favor of the franc and the dollar.

The dollar gained slightly after the Federal Reserve policy statement on Tuesday said the U.S. recovery was "on a firmer footing."

But in one of the biggest surprises since Japan's crisis began in earnest, the yen has soared across the board on expectations that Japanese companies will need to repatriate yen in support of rebuilding costs. Analysts expect this paradigm to continue, but are uncertain when the yen will fall back to earth.

A complicating factor is that the yen is also considered a shelter for nervous investors during times of global uncertainty. Because most of Japan's crushing public debt is held domestically, the country has limited external financing needs that might otherwise make it vulnerable to capital flight.

"There's been a massive liquidation of assets, and in that liquidation is stockpiling yen at record levels," said Greg Salvaggio, vice president of capital markets at Tempus Consulting in Washington. Japanese institutions "are trying to get ahead of the insurance payments they are going to have to make."

Because the vast majority of Japanese-owned assets are dollar-denominated, some market participants have speculated that repatriation selling--and the potential that Japan may need to liquidate reserves to support rebuilding costs--might put selling pressure on the dollar.

Steve B. Wyatt, a finance professor and chairman of Miami University's Farmer School of Business in Ohio, thinks Japanese companies will "reshuffle" some of their holdings, but does not expect that to unleash a torrent of dollar selling.

"I don't think it will have as big an impact as some think," Wyatt added. "It might have some impact on Treasurys, but the Japanese are a society that could increase their savings rate, so it's not so clear they'll put a lot of pressure on [the dollar]."

In a research note to clients Tuesday, HSBC Securities suggested that should the yen cease to be a safe haven--an event that some analysts see as imminent given the impact of a possible nuclear meltdown--the Norwegian krone would be one of the beneficiaries. Japanese repatriation could hurt the asset markets of Brazil, Australia, Indonesia and South Africa, they added.

"If the yen is no longer seen as a safe haven and this liquidity currency no longer operates in the usual way, the squeeze higher into the Swiss franc and the Norwegian krone could become dramatic," the bank said. "The liquidity constraint on these currencies could see the dollar benefit by default."

According to research from the Organization for Economic Co-operation and Development (OECD), the four prefectures most affected by the earthquake [Iwate, Miyagi, Fukushima and Ibaraki]account for 6 -7% of Japan's population and economic output. That makes the potential economic costs too enormous to immediately assess.

Some analysts have sought to draw parallels to Japan's disastrous 1995 Kobe earthquake. Most economists agree, however, that the impact of Friday's 9.0 earthquake will be farther reaching and much worse in its severity, given the human toll and the unfolding nuclear disaster.

In its research, HSBC noted that the yen's response to market-moving crises tends to lag the actual event as the market digests the details. The bank added that repatriation flows meant that further yen gains were a near-term possibility.


-By Javier E. David, Dow Jones Newswires; 212-416-4564; [e-mail]


Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=GK3HU88twRMjyvEU6WpYMA%3D%3D. You can use this link on the day this article is published and the following day.



(END) Dow Jones Newswires