BLBG: Yen Rises to 13-Year High Against Dollar as Carry Trades Cut
By Stanley White
Oct. 24 (Bloomberg) -- The yen climbed to a 13-year high against the dollar as the risk of a global recession prompted investors to slash carry trades, in which they fund purchases of higher-yielding assets with Japanese currency.
The yen also surged to a six-year high against the euro after Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the International Monetary Fund. The common European currency fell to a two-year low versus the dollar after Standard & Poor's Ratings Services threatened yesterday to cut Russia's debt ratings, adding to signs the credit crisis is spreading.
``I can't rule out the scenario where the yen rises even faster than I had anticipated,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third- biggest lender. ``Speculators are unwinding carry trades. This risk aversion is coming from the credit crunch and the chance of a global recession.''
The yen rose to 95.34 per dollar, the highest level since 93.28 on Aug. 15, 1995, and traded at 95.84 at 1:13 p.m. in Tokyo from 97.31 late yesterday in New York. Against the euro, it climbed to 121.75, the strongest level since November 2002, before trading at 122.57 from 125.89. The euro bought $1.2786 from $1.2934 yesterday, when it reached $1.2728, the lowest level since November 2006. The yen may rise to 90 per dollar by the end of March, Umemoto said.
The yen touched a post-World War II high of 79.75 against the dollar on April 19, 1995, prompting the Group of Seven nations to intervene that year by buying the greenback to stabilize currency markets. The G-7 is comprised of Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
Carry Trades
The yen rose 6.2 percent this week against the dollar, the biggest gain since October 1998. It surged 12 percent against the euro, the biggest weekly advance since the 15-nation currency's 1999 debut. The euro headed for a 4.7 percent decline versus the dollar.
The Australian dollar fell 4 percent to 62.53 yen from late yesterday in New York. New Zealand's dollar declined by 3.3 percent to 55.98 yen. The two currencies are favorites for carry trades, where investors borrow in countries with low interest rates and invest in nations with higher rates. The risk is that financial market moves erase those profits. Japan's target rate of 0.5 percent compares with 6 percent in Australia and 6.5 percent in New Zealand.
A rout in global stocks has wiped out more than $10 trillion of market value this month. The Nikkei 225 Stock Average slumped below 8,000 to the lowest since May 2003 after Sony Corp. slashed its earnings forecast. South Korea halted Kosdaq stock trading after the index slumped by 10 percent following data showing the slowest economic growth in four years.
U.K. Economy
The pound fell to $1.6048 from $1.6230 for a 7.1 percent drop this week on speculation the Bank of England will lower interest rates to help avert a prolonged recession. Sterling touched $1.6038, the weakest since September 2003. It slid as much as 3.4 percent on Oct. 22, the biggest intraday loss since September 1992, when investor George Soros helped drive the currency out of Europe's system of linked exchange rates.
U.K. gross domestic product rose 0.5 percent from a year earlier in the third quarter, slowing from a 1.5 percent pace of growth in the previous three months, according to a Bloomberg survey of economists. The Office for National Statistics will release the data at 9:30 a.m. today in London
The spread, or difference in yield, between two- and 10- year gilts was at 122 basis points, near the widest since October 1996, a sign traders expect the BOE to lower its 4.5 percent benchmark rates by year-end.
The euro and the pound may weaken as European and U.K. banks have five times as much loan exposure to emerging markets as the U.S. or Japan, with most lending to Eastern Europe, according to Morgan Stanley.
Emerging Markets
``Part of the reason why euro-dollar continues to drift lower has to do with the rising risk that pressures in Eastern Europe will have a negative boomerang effect on Euroland,'' London-based currency strategists Stephen Jen and Spyros Andreopoulos wrote in a research note yesterday.
European banks' lending to emerging markets is about 21 percent of Europe's gross domestic product and U.K. banks' loans are around 24 percent of the nation's GDP, compared with 4 percent for the U.S. and 5 percent for Japan, the strategists wrote, citing data from the Bank for International Settlements.
``There are concerns over country risk in Europe,'' said Toshihiko Sakai, head of trading in foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's biggest bank. ``Some currencies there appear to be under speculative attack because their banking sectors aren't sufficiently guaranteed by the governments.'' The euro may weaken to parity with the dollar by year-end, he said.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net
