Yen Jumps to Four-Year High

The yen rose to a four-year high against the dollar Thursday on reports indicating Japan’s economy was gaining steam.

The euro also rose against the dollar after the European Central Bank kept its benchmark short-term interest rate at 2% and appeared to downplay chances for a rate cut in the near term, surprising many analysts.

In Tokyo, the Bank of Japan’s “tankan” survey of business sentiment in March showed confidence among large manufacturers rose to the highest level since 1997. The survey also showed that executives at service firms were optimistic for the first time in seven years.

“The recovery in Japan seems to have legs. Things in the corporate sector look better than they have in a very long time,” said Ken Courtis, vice chairman in Asia at Goldman Sachs Group Inc. in Tokyo.

The yen strengthened to 103.71 per dollar in New York from 104.35 on Wednesday. The dollar hasn’t bought this few yen since early 2000.

Currency traders have speculated in recent days that the upbeat outlook for the Japanese economy may allow the government to back off in its attempt to restrain the yen. The government actively sold yen for dollars last year, fearing that a rising yen would hurt Japanese exporters by making their products more expensive overseas.

But as Japan’s recovery broadens, the government “is letting the currency find its natural top,” Courtis said.

Investors, however, seemed concerned Thursday that the yen’s rally could bite into export sales: The Nikkei 225 stock index slipped 0.3% to 11,683.42 despite the tankan survey. The Nikkei hit a 22-month high of 11,770 a week ago.

The euro edged up to $1.237 in New York from $1.231 on Wednesday after the European Central Bank held its key rate steady and its president, Jean-Claude Trichet, said he still predicted a gradual economic recovery in the euro region.

The euro had weakened against the dollar in recent weeks as some currency traders bet that the central bank would cut rates to help shore up the euro-zone economy, particularly in the wake of the Madrid terrorist bombings in mid-March.

Lower rates could make euro-denominated bonds less attractive, pushing the currency down. A weaker euro, in turn, would be welcomed by many European exporters.

The European Central Bank’s benchmark rate is twice the U.S. Federal Reserve’s benchmark rate of 1%.

“A lot of people had been expecting Trichet to pave the way for a rate cut,” said Ian Stannard, a currency strategist at BNP Paribas in London.

But Trichet said the economic situation in Europe “doesn’t call in any respect for a change of our interest rate.”