Japanese Yen Fueled by Earthquake

(Market prices updated.)
NEW YORK ( TheStreet) -- The Japanese yen advanced Friday after a massive, tsunami-inducing earthquake struck Japan, killing hundreds.

It was the biggest earthquake ever to hit Japan.

The U.S. dollar slid 1.3% against the Japanese currency at 81.876 yen. The CurrencyShares Japanese Yen Trust ( FXY) exchange-traded fund rose 1.3% to $120.61, while the PowerShares DB US Dollar Index Bearish ( UDN) added 0.7% to $27.87.

"You would expect any catastrophic event would have a negative impact on the victim's currency," Chuck Butler, president of Everbank World Markets, said in a morning report. "But this natural disaster has caused these Japanese investors to bring their currency back home, as they fear they will need it to help rebuild."

Over the years, Japanese investors have been investing their savings in foreign markets, including the higher-yielding currencies of New Zealand and Australia, given the near-zero interest rates in their home country. But the magnitude of the earthquake's devastation was helping to reverse this trend.

Still, Butler cautioned that the yen's appreciation will likely be short-term, and he advised longer-term investors to avoid the Japanese currency.

"The economy will actually benefit from this disaster in the short run as there will be fiscal stimulus from reconstruction. But Japan's budget deficits are already close to 10% of GDP, and this additional spending will only add to the problem facing Japan's aging population," he said.

The U.S. dollar was expected to end the week higher, while the euro was heading for its biggest weekly drop in over two months as eurozone leaders, who were holding their summit on Friday, looked to be inconclusive in their plans to solve the region's debt contagion crisis.

The greenback, noted Brown Brothers Harriman Global Head of Currency Strategy Marc Chandler, has been up four of the last five trading days, "stemming from a combination of fiscal woes in the periphery, heightened geopolitical tensions and waning risk appetite."

The euro fell 0.6% against the Japanese currency at 113.837 yen. CurrencyShares Euro Trust ( FXE) rose 0.8% to $138.47.

The Australian dollar and Canadian dollar were soft on disappointing China trade data and a weak employment report, respectively. The Australian dollar was flat at 83.11 yen, and the Canadian dollar was down 0.8% at 84.324 yen. The iShares MSCI Japan Index ( EWJ) fell 1.7% to $10.81.

Oil futures fell as the earthquake pulled the psychological trigger for the reversal in the oil prices rally. Light, sweet crude oil for April delivery fell $2.11 at $100.59 a barrel.

Oil plays were trading in mixed territory, with BP ( BP) up 0.2% at $45.75; Chevron ( CVX) rose 0.9% to $99.93. Petrobras Argentina ( PZE) fell 2.9% to $22.16.

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-- Written by Andrea Tse in New York.

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