Yen Trades Near Six-Week Low as Investors Seek Higher Yields

By Kosuke Goto and David McIntyre


Dec. 24 (Bloomberg) -- The yen traded near a six-week low against the dollar as Asian stocks gained, boosting demand for higher-yielding assets funded by loans from Japan.

Japan's currency has fallen against nine of the 16 major currencies this year as speculation the Bank of Japan will refrain from raising interest rates spurred so-called carry trades. A U.S. report this week will probably show durable-goods orders rebounded, suggesting the world's largest economy is weathering the worst housing slump in 16 years. Financial markets are shut in Japan today for a holiday.

``We're likely to see yen weakness in the short term,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney, Australia's third-biggest lender. ``Money is going to head out of Japan at the year-end for yield.''

The yen was at 114.06 per dollar as of 3 p.m. in Tokyo from 114.04 in New York on Dec. 21 when it touched 114.21, the weakest since Nov. 7. Japan's currency traded at 164.05 per euro, after falling to 164.19, the lowest since Dec. 14, compared with 163.98 at the end of last week. The dollar was at $1.4387 per euro from $1.4382.

The yuan climbed as high as 7.3405 per dollar today, the strongest since a dollar link was scrapped two years ago, from 7.3696 at the end of last week.

The yen may decline to 115 per dollar and 164.60 per euro this week, Morriss forecast.

Currency trading will be about 25 percent of usual levels because of the public holiday in Japan and many investors will be taking vacation before the Christmas break tomorrow, said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney, Australia's fourth-biggest lender. The MSCI Asia Pacific Excluding Japan Index rose 1 percent after U.S. stocks climbed at the end of last week.

Carry Trades

In carry trades, investors borrow funds in countries with lower lending rates, such as Japan's 0.5 percent benchmark, and use the cash to buy fixed-income assets in nations that offer higher returns. The U.S. benchmark rate is 4.25 percent, Europe's is 4 percent, Australia's 6.75 percent and New Zealand's 8.25 percent.

Carry trades are considered risky because currency fluctuations can erase the profits earned. Japan's currency weakened to 99.11 against the Australian dollar from 98.90 in New York late last week. It was at 86.98 per New Zealand dollar from 87.06. The yen fell to 16.2863 against South Africa's rand from 16.2255 in New York on Dec. 21.

One-month implied volatility for the yen fell to 9.7 percent, from 10.45 percent a week ago. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Lower volatility may encourage carry trades.

Durable Goods

The U.S. currency has gained against 13 of the 16 major currencies this month. Demand for cars, aircraft and other items made to last several years may have gained 2 percent in November in the U.S., according to the median estimate of economists surveyed by Bloomberg News, indicating the economy may be more resilient than traders had speculated. The Commerce Department will release the report on Dec. 27 in Washington.

The yen is heading for its eighth annual decline against the euro, having dropped 4.2 percent. Against the dollar, it is up 4.4 percent so far this year, its best performance since 2003.

The dollar has weakened against 13 of the 16 most-active currencies this year as widening credit-market losses and the worst housing slump in 16 years caused the Fed to cut interest rates three times to prop up economic growth.

The U.S. currency fell 8 percent against the euro in 2007, less than last year's 10.2 percent loss and weakened 1.3 percent against the pound compared with a 12 percent slide last year.

Rate Futures

Interest-rate futures on the Chicago Board of Trade indicate 80 percent odds the Federal Reserve will reduce the benchmark rate a quarter-percentage point to 4 percent at its Jan. 30 meeting compared with a 94 percent chance a month ago.

Losses in the euro may be limited by speculation the European Central Bank will refrain from lowering borrowing costs. The Financial Times reported the central bank will continue to focus on keeping inflation in check and will not be diverted by the interest-rate cuts by counterparts in the U.S. and U.K. The newspaper cited an interview with the bank's president, Jean- Claude Trichet, on Dec. 13.

``Europe's inflation risks have not reduced at all,'' said Takashi Yamamoto, chief trader at Mitsubishi UFJ Trust & Banking Corp. in Singapore, a unit of Japan's biggest publicly traded lender by assets. ``The ECB won't easily cut its rate. This will support the euro.''

The 13-nation currency may rise to $1.50 against the dollar by the end of March, Yamamoto said.