Yen Rises on Speculation Stock Losses Will Curb Carry Trades

By Ron Harui and Stanley White


Nov. 26 (Bloomberg) -- The yen rose against the euro on speculation declines in Asian stocks prompted investors to pare holdings of higher-yielding assets funded in Japan.

The currency also gained versus the Australian dollar and the British pound on concern that the Federal Reserve’s $800 billion plan to unfreeze credit markets won’t prevent a protracted global slump. The U.S. economy, the world’s biggest, shrank in the third quarter as consumer spending plunged the most in almost three decades, according to figures released yesterday.

“The yen should remain supported,” said Osao Iizuka, head of foreign-exchange trading at Sumitomo Trust & Banking Co. in Tokyo. “There was a bounce in sentiment after the Fed’s announcement of its latest measures. This has faded because there are still a lot of problems to work out.”

The yen rose to 123.82 per euro at 11:10 a.m. in Tokyo from 124.43 late yesterday in New York. It traded at 95.10 versus the dollar from 95.22. The euro fell to $1.3017 from $1.3064. The pound declined to $1.5393 from $1.5472. The yen may rise to 94.80 per dollar today, Iizuka said.

Against the yen, Australia’s dollar fell to 61.49 from 61.82 in New York late yesterday. The pound dropped 0.6 percent to 146.52 yen.

The MSCI Asia Pacific Index of regional shares slid 0.4 percent, while the Nikkei 225 Stock Average fell 1.3 percent.

Japan’s benchmark interest rate of 0.3 percent compares with 5.25 percent in Australia and 3 percent in the U.K.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.

Implied volatility on one-month euro-yen options rose to 34.74 percent today from 34.25 percent yesterday, indicating greater exchange-rate fluctuation risk that may erode profit on carry trades.

‘Fed’s Balance Sheet’

The Fed will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a program of $200 billion to support consumer and small-business loans, the Fed said in statements yesterday in Washington.

The U.S. currency may weaken should the Fed lose money on the debt and asset-backed securities it plans to buy. The dollar reached a 2 1/2-year high against an index of the currencies of six major U.S. trading partners last week as investors sought refuge from deepening credit losses.

“We may see the Fed’s balance sheet deteriorate because it’s taking on all these assets,” said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly listed lender. “This is a latent risk for the dollar that could weaken it over the long term.”

OECD Cuts Forecast

The Organization for Economic Cooperation and Development cut its forecast for global growth in 2009. The economies of the organization’s 30 members will contract 0.4 percent next year, after expanding 1.4 percent this year. Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July through September, the most since the 2001 recession, according to revised figures from the Commerce Department in Washington.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, traded at 85.005 from 85.000 yesterday, when it fell 1.3 percent. The index rose to 88.463 on Nov. 21, the highest level since April 2006.

The euro fell, snapping a three-day winning stretch versus the dollar, after a technical chart that some traders use to predict price movements signaled its 4.2 percent gain in the past five days was excessive.

Euro’s Rise ‘Overdone’

“The euro’s surge over the last few days seems overdone, so we may see some selling of the currency,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker.

Europe’s single currency may decline to $1.2950 and 123.30 yen today, Ishikawa said.

The euro’s 14-day stochastic oscillator versus the dollar was around 91, according to data compiled by Bloomberg. A level above 80 suggests a reversal may occur.