Wednesday, March 19, 2008

Yen Rises for 2nd Day as Falling Commodities Trim Carry Trades

By [bn:PRSN=1] Kosuke Goto []

March 20 (Bloomberg) -- The yen rose for a second day against the dollar and euro as declines in gold and oil fed speculation investors are reducing purchases of commodities that were financed with cheap loans from Japan.

The yen rose against 14 of the 16 most-active currencies after gold plunged the most since 2006 and oil fell more than $4 a barrel. Commodities sank on speculation the Federal Reserve will ease the pace of interest-rate cuts, after the central bank on March 18 signaled renewed concern on inflation. Commodities offer a hedge against inflation.

``Risk aversion has reached a new level with commodities slumping overnight,'' said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp, Australia's fourth-largest lender. ``This will add bearish sentiment toward carry and commodity currencies.''

The yen advanced to 98.89 per dollar as of 8:31 a.m. in Tokyo from 99.03 yesterday late in New York. The yen climbed to 154.67 per euro from 154.80.

The dollar traded at $1.5645 per euro, rebounding 1.7 percent from a record low of $1.5903 reached March 17. It slipped to $1.9858 against the British pound from $1.9843, and declined to 0.9970 versus the Swiss franc from 0.9982.

The franc, often favored in times of crisis, has advanced 14 percent this year against the dollar.

Currency trading volume in Asia today may be about 50 percent of normal levels because of a public holiday in Japan, said Rennie, who forecast the yen may move between 97 and 102 per dollar for the rest of this month.

Carry Trades

The yen advanced against the South African rand and the Australian dollar, popular carry-trade currencies. It rose 0.3 percent to 12.2169 versus the rand and 0.1 percent to 90.45 per Australia's currency. Japan's benchmark interest rate of 0.5 percent compares with South Africa's 11 percent, Australia's 7.25 percent and New Zealand's 8.25 percent.

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 them. The risk is that currency moves erase those profits.

Currencies of commodity-exporting nations also tumbled against the U.S. dollar. South Africa's rand fell 0.1 percent to 8.0950 per dollar. Gold for April delivery dropped 0.1 percent to $943 an ounce, following 3.9 percent drop yesterday.

``There has been a significant degree of speculation in commodities, and investment funds have flowed into the sector as an alternative to weak equities and credit markets,'' Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney, wrote in a research note today. ``The rise in commodities was getting overdone.''

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