Tuesday, March 25, 2008

Yen Rises as Stock Losses Cut Demand for Higher-Yielding Assets

By Kosuke Goto and Stanley White

March 26 (Bloomberg) -- The yen rose against the euro on speculation declines in stocks will prompt investors to pare holdings of higher-yielding assets funded with loans in Japan.

The currency gained against the Australian and New Zealand dollars, two favorites for so-called carry trades, after Asian equities fell for the first time in three days. The dollar traded close to a one-week low against the euro before a government report today that may show new home sales dropped.

``Japanese stocks are falling much more than U.S. stocks,'' said Ayako Sera, a global market strategist at Sumitomo Trust & Banking Co. in Tokyo, Japan's sixth-largest publicly traded lender by assets. ``Currency dealers are buying up the yen.''

The yen rose to 156.15 versus the euro as of 10:15 a.m. in Tokyo from 156.49 in New York yesterday. Against the U.S. dollar it rose to 98.79 from 99.98. Japan's currency advanced to 91.57 per Australian dollar from 91.75. It also gained to 80.54 per New Zealand dollar from 80.65.

The dollar traded at $1.5643 per euro after slumping 1.5 percent yesterday, the biggest drop since Jan. 3, 2006.

The yen may rise to 96 a dollar this week, Sera forecast.

One-month implied volatility for the yen rose to 16.26 percent from 16.22 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Sharper currency swings may erode profits from carry trades.

In carry trades, speculators get funds in a country with low borrowing costs and invest in one with higher returns, earning the spread between the two.

Fiscal Year-End

The dollar may decline against the yen on March 31 as Japanese companies start to sell the currency to hedge their exposure for the year ahead following the final exchange rate fixing of the fiscal year, according to Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co., the third- largest U.S. bank.

Major Japanese banks announce the yen fixing rate at 10 a.m. in Tokyo each day to their customers, based on the spot rate on 9:55 a.m.

The dollar traded near a one-week low against the euro and the British pound as traders bet the Federal Reserve will cut its target lending rate by as much as a half-percentage point next month to revive economic growth.

Purchases of new homes in the U.S. may have fallen 1.7 percent to an annual rate of 578,000 in February, from a 588,000 pace the prior month, according to the median forecast in a survey by Bloomberg News. The Commerce Department is scheduled to release the report at 10 a.m. in New York.

`A Dollar Bear'

``I am a dollar bear,'' said Takashi Miyachi, a senior currency dealer in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``With the excessive credit uneasiness being soothed, the markets are focusing more on the widening gap in interest rates between the U.S. and other nations.''

The dollar traded at $2.0052 versus the pound after touching $2.0067, the highest level since March 19, from $2.0059 yesterday. It was also at 1.0064 versus the Swiss franc from 1.0052. The dollar may fall to $1.57 a euro today, Miyachi said.

The Fed on March 18 cut its target lending rate by 0.75 percentage point to 2.25 percent, a smaller cut than economists forecast.

Rate Bets

Futures on the Chicago Board of Trade showed traders see a 28 percent chance the Fed will lower the fed funds target by a half-point to 1.75 percent by its next meeting on April 30, compared with no chance for that big a reduction a month ago. The remaining bets are for a quarter-point cut.

The U.S. currency touched $1.5903 against the euro on March 17, the lowest since the European currency debuted in 1999. The dollar will rebound to $1.45 against the euro and 104 yen by year-end as the U.S. economy recovers, according to the median forecast of 42 analysts surveyed by Bloomberg.

Any gains for the euro against the yen may be limited by speculation a report today will show German business confidence fell in March, adding to evidence economic expansion in Europe's largest economy is cooling.

The currency ended a three-day winning run against the yen as signs of a weakening economy may prompt traders to add to bets the European Central Bank will cut interest rates to spur growth, diminishing the appeal of euro-denominated assets.

The Ifo institute's business climate index declined to 103.5 from 104.1 in February, according to the median of 37 forecasts in a Bloomberg News survey.

``Should Ifo data fall by much more than expected, that would raise speculation the slowdown in the U.S. economy is spreading to other regions,'' Sasaki and Junya Tanase, at JPMorgan wrote in a research note today. ``This may push down the euro against the dollar.''

The ECB will lower its main lending rate to 3.75 percent from 4 percent by mid-year and to 3.5 percent by year-end, according to the weighted average of 20 forecasts in a Bloomberg survey.

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