By Ron Harui

March 22 (Bloomberg) -- The yen reached a one-week high against the euro on speculation more central banks will follow India in raising interest rates, damping demand for higher- yielding assets.

Japan’s currency strengthened versus all of its 16 major counterparts after the Reserve Bank of India unexpectedly raised borrowing costs on March 19, fueling expectations policy makers in nations such as China will do the same. The euro was near a two-week low against the dollar on concern the European Union will fail to agree on financial aid for Greece, reducing the appeal of assets in the 16-nation region.

“We’ve had India, and we’re assuming China is not too far away from a formal rate hike,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “It’s something the market is going to have to deal with, and it may unnerve markets a little bit. The yen and dollar might be supported.”

The yen traded at 122.35 per euro as of 10:47 a.m. in Tokyo from 122.51 in New York last week, after rising to 122.20, the strongest level since March 10. Japan’s currency was at 90.45 per dollar from 90.54. The dollar bought $1.3520 per euro from $1.3530 on March 19, when it climbed to $1.3503, the highest since March 2.

Japan’s financial markets are closed today for a holiday.

Increase ‘Imperative’

The U.S. and Japanese currencies rose on March 19 as India’s central bank said controlling price gains became “imperative” after inflation accelerated to a 16-month high. Policy makers raised the benchmark reverse repurchase rate to 3.5 percent from a record-low 3.25 percent and the repurchase rate to 5 percent from 4.75 percent. The decision came a month before the bank’s scheduled policy meeting on April 20.

Central banks in Australia and Malaysia already raised borrowing costs this month and China increased its reserve- requirement ratio by half a percentage point on Jan. 18 and Feb. 25. India’s Reserve Bank will probably raise its benchmark again next month as the first increase in two years is only the initial step in its fight against inflation, according to BNP Paribas SA and Standard Chartered Plc.

“The surprise factor in the RBI’s action was not that they hiked rates, but that it took place ahead of the next policy meeting, a fact that reflects the urgency to tackle inflation pressures,” Mitul Kotecha, head of global currency strategy at Credit Agricole CIB in Hong Kong, wrote in a research note today. “Further rate hikes are likely over coming months as the bank moves further to contain inflation.”

Ringgit, Won

Malaysia’s ringgit and South Korea’s won led Asian currencies lower as Asian stocks declined following India’s interest-rate increase.

The ringgit weakened 0.3 percent to 3.3115 per dollar and the won slid 0.4 percent to 1,137.07. The MSCI Asia-Pacific Index of regional shares slipped 0.4 percent.

The euro dropped against nine of the 16 major currencies after German Chancellor Angela Merkel told investors they shouldn’t expect this week’s EU summit to agree on any assistance for Greece.

EU leaders must not create “illusions” for markets by building expectations for Greek aid, she said in an interview with Deutschlandfunk that aired yesterday. Her remarks came after Greek Prime Minister George Papandreou and European Commission President Jose Barroso said the EU should spell out its rescue plan at the March 25-26 summit in Brussels.

“Ahead of the EU summit, concerns about Greece’s funding difficulties are expected to weigh on the euro,” said Danica Hampton, a senior markets strategist at Bank of New Zealand Ltd. in Wellington. “Meantime, the dollar will likely remain firm as investors fret about how the global economy will cope with further stimulus removal.”

‘Acute’ Challenges

Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund, in a speech yesterday at the China Development Forum in Beijing.

The Dollar Index, which tracks the U.S. currency against those of six major U.S. trading partners including the euro, rose 0.1 percent to 80.795.

--With assistance from Patrick Donahue in Berlin and Joyce Koh in Singapore. Editors: Nicholas Reynolds, Garfield Reynolds

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.

To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net.

Sourced from:www.businessweek.com