BLBG: Euro Falls to Lowest Since 2002 Against Yen as Stocks Plunge
By Ron Harui and Stanley White
Oct. 23 (Bloomberg) -- The euro fell to the lowest level since December 2002 against the yen as global stocks plunged, encouraging investors to cut holdings of higher-yielding assets funded in Japan.
The 15-nation currency dropped for a seventh day against the greenback, its longest stretch since Sept. 8, on bets the European Central Bank will lower interest rates, reducing the appeal of so-called carry trades. The British pound declined to near a five-year low on speculation U.K. consumer spending shrank and the economy slowed, increasing pressure on the Bank of England to cut borrowing costs.
``There are concerns over a deepening slowdown in Europe that may lead to further rate reductions,'' said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France's second-largest bank by market value. ``Investors may pull their money out of carry-trade currencies, so there is a bias for yen buying.''
The euro fell to 123.73 yen as of 1:06 p.m. in Tokyo from 125.60 late yesterday in New York, after dropping to as low as 123.43. The euro weakened to $1.2744 from $1.2855 late yesterday. It was earlier as low as $1.2728. The yen gained to 96.88 per dollar from 97.66, rising above 97 for the first time since March 2008. The common European currency may weaken to 120 yen and $1.2680 today, Saito said.
Asian currencies slumped on concern global growth will slow. The South Korean won slid 3.7 percent to 1,415.40, the Taiwanese dollar lost 1.2 percent to NT$33.375 and the Malaysian ringgit slipped 0.8 percent to 3.5730.
``Growth concerns are gaining increasing traction and risk aversion remains very much in play,'' said Yen Ping Ho, a currency strategist at JPMorgan Chase & Co. in Singapore. ``Currencies in the Asian region remain under pressure.''
U.K. Economy
Sterling slid to $1.6211 from $1.6267, after touching $1.6139 yesterday, the lowest since September 2003. It dropped as much as 3.4 percent, the biggest decline since September 1992, when investor George Soros drove the currency out of Europe's system of linked exchange rates. The pound was at 78.86 pence per euro.
U.K. retail sales fell 0.7 percent in September, according to a Bloomberg survey of 33 economists. The Office for National Statistics will release the data at 9:30 a.m. in London. Gross domestic product expanded 0.5 percent in the third quarter from a year ago, slowing from 1.5 percent the previous quarter, government data may show tomorrow, a separate survey showed.
Recession Risk
``We expect U.K. GDP to contract for three consecutive quarters,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``There could be 1 percentage point of rate cuts into next year. This is a good excuse to sell sterling.''
Prime Minister Gordon Brown joined BOE Governor Mervyn King in predicting yesterday that the U.K. will slip into a recession.
The BOE voted unanimously to lower the key interest rate a half-percentage point to 4.5 percent in coordinated cuts with other central banks on Oct. 8, minutes of their meeting showed yesterday.
The yen also gained as Asian stocks tumbled, prompting investors to unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher.
Japan's currency gained 1.8 percent to 64.55 against the Australian dollar and 1.1 percent to 13.4027 versus the Norwegian krone late in New York yesterday. The Bank of Japan's target lending rate of 0.5 percent compares with 6 percent in Australia and 5.25 percent in Norway.
Stock Rout
The MSCI Asia-Pacific Index of regional shares slid 4.3 percent after the Standard & Poor's 500 Index dropped to the lowest level since April 2003 yesterday.
``The stock rout is likely to push the yen up further against the euro,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The pound also looks vulnerable due to weak economic fundamentals. People are giving up on emerging markets, which is another sign investors don't want to take on risk.''
Implied volatility on one-month dollar-yen options rose to 26.32 percent from 23.91 percent yesterday, indicating greater exchange-rate fluctuations that may erode profit on carry trades.
The New Zealand dollar remained lower against its U.S. counterpart today after the Reserve Bank cut the official cash rate by 1 percentage point to 6.50 percent. The kiwi fell 0.4 percent from late yesterday in Asia to 59.35 U.S. cents. The Australian dollar fell 1.3 percent to 66.03 U.S. cents.
`Dollar Repatriation'
China Railway Group Ltd. and China Railway Construction Corp., two of the nation's biggest building companies, reported today a combined 2.26 billion yuan ($331 million) in losses after their holdings of Hong Kong, U.S. and Australian dollars depreciated against the yuan. The yuan, little changed today at 6.8369 per dollar, has gained 6.7 percent this year against the U.S. currency.
The dollar advanced against 13 of the 16 most-active currencies on speculation U.S. investors will repatriate funds held in overseas stocks and bonds on concern the global economy will slow further.
``There seems to be some dollar repatriation,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Investors are still shunning risky assets amid recessionary fears.''
The Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six major trading partners, rose to 85.755 from 85.370 yesterday. It earlier reached 86.070, the highest since October 2006.
To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net
