Yen Falls for a Second Day as Stock Gains Spur Carry Trades

By Ron Harui and Kosuke Goto


Nov. 14 (Bloomberg) -- The yen fell for a second day against the dollar and euro as a rally in global stocks gave traders confidence to buy higher-yielding assets funded with loans from Japan.

The Japanese yen slid most against the Australian and New Zealand dollars among the 16 most-actively traded currencies as investors returned to so-called carry trades. It pared this month's gains versus the euro to 2.7 percent after Goldman Sachs Group Inc. said it doesn't plan significant writedowns related to subprime mortgages, easing concern over credit-market losses.

``The recovery in equities shows there is increased risk appetite, and that hurts low-yielding currencies like the yen,'' said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan's second-largest publicly traded lender.

The Japanese currency fell to 162.88 per euro at 6 a.m. in London compared with 161.96 in late New York yesterday when it dropped 1.9 percent, the most since Aug. 29. It also weakened to 111.10 per dollar from 110.90 yesterday. The yen touched 109.13 per dollar on Nov. 12, the strongest since May 2006. It may fall to 112.20 a dollar and 163.30 per euro today, Ito forecast.

The dollar fell for a second day against the euro and the pound on speculation a government report today will show sales at U.S. retailers slowed in October, suggesting a housing slowdown is affecting other areas of the U.S. economy. Against the euro, the dollar slid to $1.4662 from $1.4602. The pound rose 0.4 percent to $2.0782.

Carry Trade Targets

Six of the 10 most-traded currencies in Asia outside Japan gained against the dollar as the Morgan Stanley Capital International Asia Pacific Index regional index rose 2.6 percent. The Nikkei 225 Stock Average gained 2.5 percent today.

The U.S. dollar also dropped 0.6 percent to 913.50 against South Korea's won, 0.4 percent to S$1.4446 versus Singapore's dollar, and 0.2 percent to 3.3412 per Malaysian ringgit.

The yen dropped 1.1 percent to 100.40 per Australian dollar and 1.1 percent to 85.11 per New Zealand's. The two currencies are popular targets of carry trades because of their higher interest rate premium over Japan.

In carry trades, investors borrow in a country with low interest rates such as Japan's 0.5 percent, and buy assets in places with higher rates. Borrowing costs in Australia and New Zealand are 6.75 percent and 8.25 percent, respectively. The risk is that currency fluctuations erase those profits.

Volatility implied by dollar-yen options expiring in one month, with a strike price near the current price fell to 12.40 percent from 14.35 percent yesterday. Traders quote implied volatility, a measure of expectations for future price swings, as part of pricing options.

Retail Sales

Bank of America Corp. cut its forecast for the dollar on concern subprime losses and a slowing economy will reduce the appeal of U.S. assets. It predicts the dollar will trade at $1.48 per euro by year-end, compared with a previous forecast of $1.44.

``Concern over the U.S. financial sector cannot be cast aside any time soon,'' Tomoko Fujii, head of economics and strategy for Japan at Bank of America N.A. in Tokyo, said in an interview today. ``Expectations of lower interest rates will likely lead to the dollar depreciation.''

Banks are facing stricter rules on valuing their so-called Level 3 assets, the most difficult to value, said Tetsuhisa Hayashi, chief currency trader in Tokyo at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan's largest publicly traded lender by assets.

European Growth

Assets that fall into the category include mortgage-related securities and loans for leveraged buyouts, as well as private equity and real estate investments.

``U.S. subprime mortgage problems are getting worse,'' said Hayashi. ``This will inevitably affect U.S. consumption, buffeting the dollar,'' which may fall to 95 yen by year-end.

The euro also gained against the yen on speculation a report today will show economic growth in the 13 nations rebounded in the third quarter, backing the case for the European Central Bank to raise interest rates.

``The euro-zone economy seems to be doing well,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest foreign-exchange broker. ``A rate hike is possible. The euro is likely to strengthen.''

European Interest Rates

The region's economy grew 0.6 percent in the three months ending Sept. 30, after a 0.3 percent increase in the previous period, according to a Bloomberg News survey of economists. The European Union statistics office releases the data at 11 a.m. in Luxembourg.

Traders increased bets the ECB will raise its benchmark rate from 4 percent this year, futures contracts showed. The implied yield on the Euribor December futures contract was at 4.51 percent today, compared with 4.50 percent on Nov. 9.

The contract settles to the three-month interbank offered rate for the euro, which averaged 18 basis points more than the ECB's benchmark rate from 1999 until credit markets collapsed in August. Since then the spread has averaged 72 basis points.