Monday, March 24, 2008

Yen Trades Near One-Week Low Against Dollar on Rising Stocks

By Stanley White and Ye Xie

March 25 (Bloomberg) -- The yen traded near a one-week low against the dollar on speculation rising Asian stocks will renew investors' confidence in higher-yielding currencies.

Japan's currency declined against the Australian and New Zealand dollars, two favorites of so-called carry trades, after JPMorgan Chase & Co. agreed to buy 39.5 percent of Bear Stearns Cos., increasing the chance that a Federal Reserve-sponsored bailout will succeed. The dollar traded near a two-week high against the euro on optimism U.S. interest rate cuts will support economic growth.

``The yen is likely to pull back further,'' said Hiroshi Yoshida, foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan's fifth-largest publicly traded lender by assets. ``We've reached an inflection point in bad news from the U.S. That restores confidence in carry and also helps the dollar.''

The yen traded at 100.69 per dollar at 8:43 a.m. in Tokyo after dropping 1.2 percent yesterday when it reached 100.89, the lowest since March 14. It traded at 155.47 per euro following a 1.2 percent decline yesterday. The dollar traded at $1.5431 against the euro after rising yesterday to $1.5341, the highest since March 12.

Japan's currency and the Swiss franc depreciated against the Australian and New Zealand dollars on speculation investors are increasing carry trades. The yen traded at 91.62 per Australian dollar from 91.26 and was at 80.71 per New Zealand dollar from 80.38 yesterday.

U.S. stocks rallied yesterday to the highest levels this month as JPMorgan quadrupled its bid for Bear Stearns to about $10 a share. The Standard & Poor's 500 Index and the Dow Jones Industrial Average rose 1.5 percent.

`Under Control'

``It does appear that the Fed has this credit crisis under control at the moment,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``Some of the risk- averse trades are being taken off, and that weakens the yen.''

The benchmark lending rate is 0.5 percent in Japan and 2.75 percent in Switzerland, among the lowest in industrialized countries. When risk aversion falls, traders borrow in the currencies of those countries to buy assets where borrowing costs are higher, benefiting from differences in yields. The risk of such investments is that currency fluctuations wipe out gains. The target lending rates are 8.25 percent and 7.25 percent in New Zealand and Australia, respectively.

The dollar posted its first weekly gain against the euro in a month after the Fed on March 18 cut the target lending rate by 0.75 percentage point to 2.25 percent and said signs ``of inflation expectations have risen.''

Fed Actions

The Fed two days earlier said it would allow securities firms to borrow at the same interest rate as commercial banks. It also backed the sale of Bear Stearns to JPMorgan Chase.

Even with the dollar's recent gains, strategists at Deutsche Bank AG, the world's biggest foreign-exchange trader, say the U.S. currency is likely to weaken to $1.60 versus the euro and may lead the so-called Group of Seven nations to coordinated intervention, in which central banks agree to purchase a currency to boost its value.

``The risks of coordinated intervention are going to increase in the second quarter for sure as the dollar weakens further,'' said Mitul Kotecha, head of foreign-exchange research in London at Calyon. The firm is the securities unit of Credit Agricole SA, France's second-biggest bank.

The G-7, which comprises the U.S., U.K., Canada, Japan, Germany, France and Italy, said Feb. 9 that ``excess volatility and disorderly movements in exchange rates are undesirable.''

Currency Volatility

The implied volatility of the three-month dollar-yen option fell to 13.8 percent after touching 19.5 percent last week, the most since 1999. The G-7 next meets April 12-13 in Washington.

The dollar has rebounded about 5 cents from $1.5903 per euro on March 17, the lowest level since the European currency made its debut in 1999.

The U.S. currency briefly rose against the euro yesterday after sales of existing homes unexpectedly rose in February for the first time in seven months. Purchases increased 2.9 percent to an annual rate of 5.03 million, the National Association of Realtors said in Washington.

``We expect the dollar to rebound here,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodian bank, in an interview with Bloomberg Television.

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