Yen Falls as Asian Stocks Pare Decline, Supporting Carry Trades

By Kosuke Goto and Ron Harui


Nov. 20 (Bloomberg) -- The yen fell against all 16 of the most-actively traded currencies as Asian stocks pared earlier declines, giving traders confidence to buy higher-yielding assets funded with loans from Japan.

The currency slid the most against the South African rand and the New Zealand dollar as investors returned to so-called carry trades. The yen retreated from near a 1 1/2-year high against the dollar on speculation the Federal Reserve's quarterly forecasts will suggest the economy will withstand a housing slump.

``Stock markets are calming down,'' said Kenichi Yumoto, senior dealer in Tokyo at Societe Generale SA, France's third- biggest lender. ``Increased risk appetite is pushing down the yen.''

The Japanese currency declined to 110.42 per dollar at 7:17 a.m. in London compared with 109.76 yen late in New York yesterday. It also weakened to 162.14 per euro from 160.95. The yen may move between 109.30 and 110.30 a dollar today, Yumoto forecast. The dollar was at $1.4682 per euro from $1.4665.

The Nikkei 225 Stock Average rose 1.1 percent, after falling as much as 1.9 percent, and the Morgan Stanley Capital International Asia Pacific Index was little changed, paring a drop of 2.6 percent. The Nikkei had a correlation of 0.95 with the dollar against the yen in the past month. A reading of 1 would mean the dollar and the index moved in lockstep.

The Japanese currency fell 1.1 percent to 83.67 versus the New Zealand dollar from 82.74. It also declined 0.8 percent to 97.90 per Australia's dollar, from 97.04. The yen weakened 1.3 percent to 16.3923 versus the rand from 16.1812.

Volatility, Fed Minutes

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

One-month implied volatility for the yen rose to 13.80 percent, from 13.20 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Higher volatility may discourage carry trades.

The Fed is scheduled to issue the minutes from its Oct. 31 meeting at 2 p.m. The central bank is also expected to release quarterly forecasts for the economy and inflation.

The figures will probably show growth in gross domestic product will slow to about 1.5 percent this quarter from 3.9 percent in the third, Goldman Sachs wrote in a report yesterday by economists including Edward McKelvey in New York. Fed officials will also acknowledge a ``meaningful increase'' in inflation, the report said.

``The Fed is likely to be somewhat optimistic about the economy and financial markets,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third- biggest lender. ``This could lead to a reduction in expectations for rate cuts and could be a positive for the dollar.''

`Rough Patch'

Fed Governor Randall Kroszner said Nov. 16 the U.S. economy is going through a ``rough patch'' that doesn't warrant lowering benchmark interest rates further.

A government report today will show U.S. housing starts fell to the lowest last month in 14 years, according to a Bloomberg survey of economists.

Futures traded on the Chicago Board of Trade show the odds of the U.S. central bank cutting rates a quarter-percentage point to 4.25 percent on Dec. 11 are 96 percent, up from 72 percent a month ago.