Yen Gains After Watanabe Says Japan Watching Subprime Losses

Yen Gains After Watanabe Says Japan Watching Subprime Losses

By Kosuke Goto and Ron Harui
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Sept. 5 (Bloomberg) -- The yen gained after Japan's chief financial regulator said he will monitor credit market losses at the nation's banks, prompting traders to sell riskier investments bought with loans in the currency.

Japan's yen rose against all of the 16 most-active currencies as climbing money market rates suggested global banks are reluctant to lend, causing investors to reduce so-called carry trades. Asian stocks fell after Yoshimi Watanabe said the Ministry of Finance is watching half-year earnings for losses related to the U.S. subprime mortgage crisis.

``Watanabe's comments seemed to make investors risk-averse, spurring yen-buying,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``The retreat in stocks also helped to lift the yen.''

The yen rose to 115.75 against the dollar as of 7:50 a.m. in London from 116.33 yesterday in New York. It also climbed to 157.26 per euro from 158.26. It may advance to yesterday's high of 115.34 versus the dollar and 156.54 per euro, Uchida said.

Japan's currency climbed the most against New Zealand's dollar and South Africa's rand, favorites of carry trades because their interest rates are at least 7.75 percentage points higher than Japan's. The yen rose 1.3 percent to 80.04 per New Zealand dollar and to 15.9380 versus the rand.

The currency snapped two days of losses after Watanabe, who was named chief financial regulator last week, told reporters ``I'll be watching carefully when banks report for a clearer view of losses related to the subprime problem.''

The yen's gains accelerated after Barclays Plc, the third- biggest U.K. bank, said in a statement today that it will remove four funds from trading on the Irish Stock Exchange. Three-month Libor was yesterday set at 5.698 percent, the highest since January 2001, according to the British Bankers Association. It has climbed 34 basis points since the beginning of last month.

Beige Book

The dollar also fell against the yen before the Federal Reserve's regional survey of the economy, which may highlight signs of an economic slowdown.

The currency ended a two-day rally on speculation an increase in money market borrowing costs will prompt the Fed to improve access to funds by cutting its benchmark interest rate this month. The survey, known as the Beige Book, may show mortgage defaults and rising financing costs are curbing demand in the world's biggest economy.

``The dollar still remains weak,'' said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities. ``The Beige Book may show a downside risk with the U.S. economy. The Fed may indicate the correction of housing markets will adversely affect consumer spending.''

The dollar may decline to 115.50 yen today, Fukaya said.

Fed Bank of Richmond President Jeffrey Lacker said in an interview with Reuters yesterday he would support a rate cut if financial turmoil led to a slowing in economic growth, while cautioning that the outcome is ``unclear.''

The central bank cut its rate on loans to banks on Aug. 17 and said risks to growth had increased.

Interest-rate futures show a 54 percent chance the Fed will lower its 5.25 percent rate to 4.75 percent at a Sept. 18 meeting, up from 44 percent a week ago. The odds of a reduction to 5.0 percent are 46 percent.

Last Updated: September 5, 2007 03:15 EDT