Friday, September 21, 2007

Yen Falls Versus Euro, Dollar as Investors Seek Riskier Assets

By Min Zeng

Sept. 21 (Bloomberg) -- The yen dropped the most in a week against the dollar and touched a six-week low versus the euro as gains in U.S. stocks and falling corporate borrowing costs encouraged investors to resume risky bets.

Japan's yen declined against all 16 major currencies as investors jumped back into the so-called carry trade. The cost of overnight loans in dollars dropped a third day, after the Federal Reserve's unexpected move to cut its benchmark interest rate by a half-percentage point to 4.75 percent on Sept. 18.

``Risk aversion is coming down, which gives investors an incentive to push down the yen,'' said Christian Dupont, a senior currency trader at Societe Generale SA in Montreal.

The yen fell 0.7 percent to 115.56 per dollar at 9:38 a.m. in New York, dropping the most since Sept. 13. The Japanese currency declined 0.8 percent to 162.65 per euro, touching the weakest since Aug. 9. The yen has lost 0.2 percent versus the dollar and 1.6 percent against the euro this week.

The dollar was little changed at $1.4078 per euro after earlier reaching $1.4120, the weakest since the euro's debut in 1999. For the week, the dollar has dropped 1.5 percent versus the euro as the Fed's rate cut dimmed the allure of U.S. deposits.

Brazil's real and the New Zealand dollar led gains against the yen, rising 1.5 percent today.

`Cheap Money'

Japan's 0.5 percent benchmark borrowing rate, the lowest among industrialized nations, has fueled a 6.7 percent drop in the yen against the euro over the past year. Japan's target compares with 4 percent in the euro region, 6.5 percent in Australia and 8.25 percent in New Zealand.

In the carry trade, investors borrow in a country with low interest rates and invest where rates are higher, earning the difference. The risk is that currency moves may erase profits.

The London interbank offered rate that banks charge each other for overnight loans in dollars dropped 4 basis points to 4.90 percent, according to the British Bankers' Association. A basis point is 0.01 percentage point. The Standard & Poor's 500 Index gained 0.6 percent at the start of trading.

``Cheap money definitely helps out the carry trade,'' said Joseph Francomano, vice president of foreign exchange at Erste Bank in New York. ``Nobody is diving in 100 percent but they are definitely getting their feet wet again. That is weakening the yen.''

Last Updated: September 21, 2007 09:52 EDT

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