Yen Rises to Six-Week High; G-7 Shows Concern on Global Growth

By Kosuke Goto and Ron Harui

Oct. 22 (Bloomberg) -- The yen rose to a six-week high against the dollar after the Group of Seven nations said a credit-market rout will slow economic growth, prompting investors to sell riskier assets bought with loans in Japan.

The Japanese yen advanced versus all 16 of the most-active currencies and reached a three-week high against the euro as investors reduced so-called carry trades. The dollar fell to an all-time low versus the euro after the G-7 communique failed to address the currency's decline following an Oct. 19 gathering in Washington.

``There is no doubt that the carry trade is over for now,'' said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. ``Investors are risk averse and the yen is being bought.''

The yen rose to 113.26 a dollar, the strongest since Sept. 10, before trading at 113.43 at 9:31 a.m. in Tokyo from 114.51 late Oct. 19 in New York. It also climbed to 162.49 per euro, the highest since Sept. 26, before trading at 162.62, from 163.79. The dollar fell to $1.4348 per euro, the lowest since the European currency was formed, before trading at $1.4337.

Japan's currency may advance to 112.50 against the dollar and 162.00 per euro today, Muta forecast.

The yen rose most against the New Zealand's and Australia's dollars, popular carry trade currencies. It climbed to 84.00 versus New Zealand's dollar, the highest since Sept. 25, from 85.60 on Oct. 19. It also strengthened to 100.47 versus the Australian dollar from 101.94 and advanced to 8.08555 versus South Korea's won, the strongest since Sept. 18, from 7.91915.

Carry Trades

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 the borrowing and lending rate. The risk is that currency moves erase those profits.

One-month implied volatility for the yen rose to 9.9 percent today, from 7.93 percent a week ago. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Higher volatility may discourage carry trades.

The Bank of Japan's benchmark borrowing cost is 0.5 percent, the lowest among major economies, and compares with the European Central Bank's 4 percent, the Federal Reserve's 4.75 percent and Australia's 6.5 percent.

Japan's Nikkei 225 Stock Average fell 3 percent.

Volatility `Undesirable'

The statement will ``make the foreign-exchange market sensitive to the global slowdown,'' said Toru Umemoto, chief currency strategist at Barclays Capital in Tokyo. ``The yen is likely to appreciate due to a decline of global equity prices, in particular emerging market equity prices.''

Japan's currency may rise as high as 109 a dollar by year- end, Umemoto said.

Policy makers representing the U.S., U.K., Japan, Germany, Italy, France and Canada stuck to language in prior statements, saying ``excess volatility'' in currencies is ``undesirable'' and that currencies should trade in line with fundamentals.

``The G-7 meeting will do little to stop the U.S. dollar's fall,'' said Robert Rennie, chief currency strategist at Westpac Banking Corp in Sydney. ``Outside the French, the level of concern on the euro was limited. Other officials sounded almost supportive of a weaker U.S. dollar.''

The G-7 also intensified calls for China to let its currency strengthen. The Chinese yuan ended last week at 7.5080, having advanced 4.1 percent against the dollar this year compared with the euro's 8.9 percent gain versus the U.S. currency. China's currency has lost 4.4 percent versus the euro.

`Correct Direction'

``We have been advancing in the direction of a market- oriented, foreign-exchange regime,'' People's Bank of China Deputy Governor Wu Xiaoling said in Washington last week. ``Maybe we are not rushing things as some people wish us to do, but we are moving in a correct direction and in a smooth manner.''

China has built $1.4 trillion in reserves while managing its currency to fuel exports. The National Development and Reform Commission forecast last month that the nation's trade surplus might widen to $300 billion this year, from $177.5 billion in 2006.

The euro may strengthen after European Central Bank officials said food costs and record oil prices are fanning inflation pressures in the 13 euro nations.

``Inflation risks have increased recently'' and the ECB will ``have to counter these risks should they materialize,'' said Germany's Bundesbank President Axel Weber in an interview yesterday. Austrian colleague Klaus Liebscher said the threat of faster inflation is ``significant.''

Oil prices have surged 45 percent since the start of the year and the cost of crude rose above $90 per barrel for the first time on Oct. 19.

``A stronger euro is good for the ECB, which is worried about inflation risks,'' said Osamu Takashima, chief analyst for global market sales and trading at Bank of Tokyo Mitsubishi UFJ Ltd. ``The ECB will prefer a stronger euro to a rate hike.''

Europe's single currency may rise to $1.45 against the dollar this year, Takashima said.