Yen Heads for Second Weekly Gain on Stock Losses, Credit Risk

By Kosuke Goto and Stanley White


Nov. 16 (Bloomberg) -- The yen headed for a second weekly gain against the dollar as companies reported more losses linked to U.S. mortgage defaults, prompting investors to cut holdings of higher-yielding assets funded with loans in Japan.

The Japanese yen rose versus the 16 most-actively traded currencies after Barclays Plc, the U.K.'s third-largest bank, announced writedowns of $2.7 billion yesterday and Wells Fargo & Co. said the U.S. housing market is the worst since the Great Depression. The yield advantage for two-year Treasuries over similar-maturity Japanese debt narrowed to the lowest since 2004.

``The yen has been strengthening a fair bit on that safe- haven play,'' said Jim Vrondas, manager of corporate business at online foreign-exchange dealer OzForex Ltd. in Sydney. ``The market's focus is on credit risk and we've seen scattered behavior during the week with big sharp drops in equity markets. That's likely to continue in the short term.''

The yen traded at 160.78 per euro at 12:26 p.m. in Tokyo from 161.19 in New York late yesterday and 162.48 on Nov. 9. It was at 110.01 per dollar from 110.30 yesterday and 110.69 a week ago. The dollar traded at $1.4615 per euro from $1.4612 yesterday and $1.4678 a week earlier.

The Morgan Stanley Capital International Asia Pacific Index fell 1.6 percent after Wells Fargo, the second-largest U.S. mortgage lender, said home-equity losses will remain ``elevated'' in 2008.

The spread, or difference in yield, between benchmark two- year U.S. and Japanese government bonds, among the securities most sensitive to monetary policy changes, narrowed to 2.60 percentage points from 4.02 points in June.

Mutual Trusts

The yen fell earlier as Japanese investors put money into mutual trusts specializing in overseas securities.

Three funds will invest about $5 billion from today, according to data compiled by Bloomberg. One fund is devoted to higher-yielding debt while the other two will put money in Brazilian stocks and bonds. Japan's benchmark rate of 0.5 percent is the lowest among major economies, encouraging investors to seek higher returns offshore in so-called carry trades.

Bank of Japan Deputy Governor Toshiro Muto said the U.S. housing recession and financial-market turmoil could hurt Japan's economy, making it ``difficult'' to decide when to raise interest rates.

The central bank expects the economy to keep growing with stable prices, though ``we must examine both upside and downside risks carefully,'' Muto, 64, said in an interview yesterday in Tokyo. ``This is quite a difficult situation.''

``These funds are likely to prove popular among Japanese investors,'' said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest lender by assets. ``This supports yen selling.''

Dollar-Selling Catalyst?

Gains in the dollar may be limited by speculation a report today will show foreign purchases of U.S. securities won't rebound enough to keep financing the trade deficit.

A Treasury Department report will show foreigners purchased $71.5 billion of U.S. assets in September from net sales of a record $69.3 billion in August, according to a Bloomberg News survey. A report on Nov. 9 showed the U.S. trade deficit was $56.5 billion in September.

``Even though figures show a net inflow of foreign purchases of U.S. assets, that could be yet another dollar- selling catalyst,'' said Tohru Sasaki, chief strategist at JPMorgan in Tokyo and a former chief currency trader at the Bank of Japan. ``Unless figures rise above $56.5 billion, this could raise concern over the U.S. current-account deficit.''

The U.S. currency may fall to as low as 109.50 yen today, Sasaki said.

International investors sold a record amount of U.S. securities in August as soaring credit costs sparked an exodus from the stock market, the Treasury Department said in Washington on Oct. 16, when the dollar fell 0.4 percent against the yen. None of the dozen economists surveyed by Bloomberg News predicted the decline, the first since Russia defaulted in 1998.