NEW TECHNOLOGY

By Bo Nielsen and Ron Harui

Feb. 16 (Bloomberg) -- The yen rose after finance ministers from the Group of Seven nations said the “severe” global slump will persist for most of 2009 and Japan’s economy shrank by the most since 1974, spurring investors to sell riskier assets.

The yen snapped two days of losses against the dollar and the euro as G-7 officials refrained from making any statement in support of efforts by Japan to weaken its currency. The pound fell versus all of the 16 most-active currencies after the Confederation of British Industry said the U.K. economy will contract at almost twice the pace previously forecast this year.

“Investors are starting to price in the prospect of this recession lasting longer than previously expected,” said Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi Ltd., a unit of Japan’s largest publicly traded bank by assets. “The yen will remain quite firm in the next three months before it starts to drop off.”

The yen was at 91.83 against the dollar as of 9 a.m. in London, from 91.93 in New York on Feb. 13. It advanced to 117.18 per euro, from 118.37. The dollar strengthened to $1.2764 per euro, from $1.2862.

Japan’s currency may appreciate to 110 versus the euro in the next three months as the European economic outlook worsens, Hardman said. Japan’s own poor economy will the drive to 100 versus the dollar by year-end, he said.

‘Disorderly Movements’

“Market reaction to the G-7 has been generally one of disappointment,” Geoff Kendrick, a senior currency strategist at UBS AG in London, wrote in a research note today. “Further follow-through in terms of dollar and yen strength should be expected.”

The G-7 repeated its message that “excess volatility” and “disorderly movements” in exchange rates must be avoided. The group accounts for about two-thirds of the world economy and is composed of the U.S., Japan, Germany, U.K., Italy, Canada and France.

Exchange-rate movements may be volatile today as a national holiday in the U.S. reduces trading volumes, said Masashi Kurabe, head of currency sales and trading at Bank of Tokyo-Mitsubishi in Hong Kong.

Japan’s economy shrank 12.7 percent in the fourth quarter from a year earlier, the Cabinet Office said. That’s the third consecutive quarter gross domestic product has contracted.

The British pound fell after the CBI, Britain’s biggest business lobby, said the U.K. economy will shrink 3.3 percent this year, almost twice the 1.7 percent pace previously forecast. By the end of 2009, the economy will have contracted for six consecutive quarters, it said.

BNP Paribas Forecast

“The dollar will benefit from renewed growth pessimism,” analysts led Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, wrote. “Global economic weakness creates dollar demand via de-leverage and reversing cross border flows.” The dollar will strengthen to $1.22 per euro and 95 yen by the end of September, BNP Paribas said.

The MSCI World Index dropped 0.5 percent and the Dow Jones STOXX 600 of European shares dropped 0.4 percent. Japan’s current-account surplus makes the yen attractive to investors in times of turmoil, as it means the country doesn’t rely on overseas lenders.

The pound also weakened against the dollar and the euro after the G-7 finance chiefs avoided any reference to the U.K. currency.

There was “no mention, discussion of the pound” at the G-7 meeting, Callum Henderson, head of global currency strategy, and Thomas Harr, senior currency strategist, at Standard Chartered Plc in Singapore, wrote in a research note today. “This may prove negative for sterling. Euro-pound in particular is likely to bounce on the back of this omission.”

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net