By Yasuhiko Seki and Ron Harui
March 10 (Bloomberg) — The yen fell for a third day against the euro before government reports that analysts say will show Japan’s recession is deepening, reducing the appeal of the currency.

The euro approached a two-month high against the yen on speculation European investors are bringing home earnings on overseas assets before the end of the financial quarter. South Korea’s won gained for a third day versus the dollar, climbing from near an 11-year low, as overseas investors bought more of the nation’s shares than they sold. The yen also weakened against the Australian and New Zealand dollars.

“Japan’s economic data are poor and the political situation is uncertain, which all bode ill for the yen,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-largest lender. “There is a possibility of the yen testing 100 per dollar shortly.”

The yen dropped to 125.09 versus the euro as of 11:56 a.m. in Tokyo from 124.65 late in New York yesterday. The currency traded at 98.86 yen per dollar from 98.84. The euro climbed to $1.2651 from $1.2611.

The yen fell against all 16 of most actively traded currencies before a Cabinet Office report that will show the leading index of business conditions fell to 77.4 in January from 80 in December, according to a Bloomberg survey. The coincident index, which shows current economic activity, dropped to 89.8 from 92.4, a separate survey showed. The reports are due at 2 p.m. in Tokyo.

‘Vulnerability’

“The incoming data is likely to illustrate the vulnerability of the Japanese economy,” said Takashi Matsumura, a Tokyo-based economist at Mizuho Research Institute Ltd., a unit of Japan’s second-largest banking group. “The weak data will be yen-negative.”

Japanese machinery orders slumped 40 percent in January from a year earlier, according to another Bloomberg survey before a Cabinet Office report tomorrow. The world’s second- biggest economy shrank an annualized 12.7 percent last quarter, the government said Feb. 16, the biggest contraction since 1974.

The yen fell 0.9 percent to 62.96 versus the Australian dollar and weakened 0.7 percent to 49.06 against the New Zealand dollar from late in New York yesterday.

Repatriating Funds

The euro strengthened on speculation European investors will bring home overseas earnings as they close their books before the end of this quarter.

“Investors in central and eastern Europe appear to be repatriating funds,” saidHideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co., a unit of Japan’s largest brokerage. “This will probably keep the euro firm.”

The euro may strengthen to $1.27 and 126.50 yen this week, Amikura said.

European Central Bank President Jean-Claude Trichet, who chaired a meeting of global central bankers in Basel, Switzerland, yesterday, said investors are underestimating the potential for a return to economic growth and that the world may be approaching a turning point.

The Korean won rose 1 percent to 1,533.75 per dollar, according to Seoul Money Brokerage Services Ltd. The currency has dropped 18 percent this year, after sliding 26 percent in 2008, and touched 1,597 on March 6, the lowest level since 1998.

“There are offshore players who are selling dollars for the won after an excessive overshoot in the exchange rate in recent weeks,” said Roh Sang Chil, a currency dealer with Kookmin Bank in Seoul. “Rising stocks are lending support to the currency market. From April, we’ll see the overall situation improving.”

Buy Signals

Daily momentum charts such as the stochastic oscillator and moving average convergence/divergence are showing “buy” signals for the euro, said Masashi Hashimoto, a currency analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo.

“If the euro can break the 21-day moving average of $1.2726, which has capped its gains recently, we may want to be bullish on the prospect of the single currency,” he said.

A stochastic oscillator chart measures the closing price of a security relative to its highs and lows during a particular period to try to predict whether it will rise or fall. MACD charts can indicate whether a price shift is a change in trend or a short-term deviation by comparing moving averages based on nine-, 12- and 26-day periods.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

To contact the reporters on this story: Yasuhiko Seki in Tokyo atyseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

Last Updated: March 9, 2009 23:04 EDT