April 27 (Bloomberg) -- The yen rose for a fourth day against the dollar after Lawrence Summers said the U.S. economy will keep shrinking and as the spread of swine flu boosted demand for Japan’s currency as a refuge from the recession.

The yen strengthened against all 16 of the most-traded currencies after Summers, director of the White House National Economic Council, said yesterday the U.S. “economy will continue to decline,” with “sharp declines in employment for quite some time this year.” High-yielding currencies including those of Australia and New Zealand weakened as the worldwide number of cases of swine flu increased, leading to concern tourism will slump.

“The market is returning to pessimism-driven trading,” said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s third-largest bank. “This means that the yen may be bought.”

The yen rose to 96.87 per dollar as of 11:33 a.m. in Tokyo from 97.17 last week in New York. Japan’s currency advanced to 127.59 per euro from 128.66. The dollar climbed to $1.3171 per euro from $1.3242 last week.

Japan’s currency gained 1.6 percent to 69.15 per Australian dollar, and jumped 1.6 percent to 54.71 per New Zealand dollar.

The yen may strengthen to 90 per dollar by the middle of next month, Uno said.

Summers’ comments on “Fox News Sunday” came before a U.S. report in two days that economists say will show the world’s largest economy contracted 4.7 percent in the first quarter, after shrinking 6.3 percent in the final three months of 2008.

Swine Flu

Higher-yielding currencies declined after President Barack Obama’s administration declared a public health emergency and released stockpiles of medicine because of a growing number of swine flu cases in the U.S. and Mexico. New illnesses were also confirmed in Canada, and suspected in Brazil and Europe and New Zealand.

“The outbreak of swine flu sparked concerns about geopolitical risk and enhanced risk aversion,” said Kenichi Yumoto , head of foreign exchange sales at Societe Generale SA in Tokyo. “This led to buying of the yen.”

The Mexican peso fell for a second day against the dollar after Mexico requested the closure of bars, movie theaters and churches in the capital to fight swine flu. The peso fell 1.7 percent to 13.5772 per dollar today.

New Zealand’s dollar slid 1.1 percent to 56.57 U.S. cents on concern an outbreak of swine flu may curb tourism, which makes up 10 percent of the local economy. Australia’s currency declined 1.1 percent to 71.51 U.S. cents.

Reasons to Sell

“There are plenty of reasons to sell the New Zealand dollar and on the margin the swine flu news doesn’t help,” said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. The currency will “struggle this week” and may fall toward 55 U.S. cents, she said.

The euro fell for a second day against the yen on concern the European Central Bank will lower its policy interest rate at its next policy meeting on May 7.

ECB President Jean-Claude Trichet may signal he will lower rates further when he speaks today at a conference on trends in global finance at the New York Federal Reserve Bank. Vitor Constancio, a member of the ECB governing council, speaks at a conference on corporate governance and consumer interests in Lisbon.

Quantitative Easing

“As well as the expected cut, there is also a chance of the ECB introducing so-called quantitative monetary easing,” said Kengo Suzuki, a Tokyo-based currency strategist at Shinko Securities Co. “This prospect may weigh on the euro.”

Quantitative easing is when a central bank buys public or private debt to add liquidity into the banking system.

ECB council member Nout Wellink said the bank should consider lowering the benchmark rate below 1 percent, Market News International reported yesterday, citing an interview.

“This is part of a discussion we should have in the governing council,” Wellink told the news agency in Washington. “Of course that should be discussed.”

Investors in the past week raised bets the ECB will reduce its 1.25 percent target lending rate at its May 7 meeting. The implied yield on the three-month Euribor interest-rate futures contract for June delivery fell to 1.295 percent from 1.325 percent a week ago.

Foreign Demand

Investors bullish on the U.S. economy say the dollar will strengthen as America recovers first from the global economic recession. Those who expect the longest contraction since the early 1980s to continue say the currency should appreciate as the haven from turmoil in world markets. Foreign investors bought a net $22 billion of U.S. financial assets in February, the Treasury Department said April 15.

“The equity-flow data have been dollar supportive almost any way you look at it,” said Robert Blake, head of strategy for North America in Boston at State Street Global Markets LLC, which has $11.3 trillion in assets under custody. When people flood into the equity market they’ve been buying the dollar as well.”

So far, the data show undiminished foreign demand for U.S. financial assets. Net purchases totaled $22 billion in February as China and Japan added to their holdings of U.S. government debt, the Treasury said. The Fed’s holdings of Treasuries on behalf of foreign central banks and other institutions rose 8.7 percent this year to $1.84 trillion.

More foreign money flowed into U.S. stock markets in the 20 business days ended April 15 than in 69 percent of the other 20- day periods going back to 1997, according to State Street data. The five-day flow was in the 77.6 percentile, compared with outflows in the last six months that were higher than 86.4 percent of past periods, the data showed.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.