BLBG: Yen Rises to 13-Year High as Investors Exit High-Yield Assets
By Stanley White and Agnes Lovasz
Oct. 24 (Bloomberg) -- The yen climbed to a 13-year high against the dollar as the prospect of a global recession prompted investors to dump higher-yielding assets funded in Japan. The dollar rose to a two-year high versus the euro.
The Japanese currency also surged to the strongest in six years 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 dollar advanced against every major currency except the yen as stocks tumbled after Samsung Electronics Co.'s profit slumped and Air France SA said it will be difficult to meet earnings targets.
``There's a powerful de-leveraging and risk aversion dynamic globally across all financial markets and that's helping prompt the strengthening of the yen,'' said Robert Minikin, a currency strategist with Standard Chartered in London. ``We're seeing a lot of weakness in higher-yielding currencies and the yen is performing well. As balance sheets shrink and assets are repatriated, that can help the U.S. dollar.''
The yen rose to 94.77 per dollar, the highest level since Aug. 15, 1995, and traded at 95.14 at 9:02 a.m. in London from 97.31 yesterday in New York. Against the euro, it climbed to 120.43, the strongest level since November 2002, before trading at 120.93 from 125.89. The euro bought $1.2662, the lowest since October 2006, from $1.2934 yesterday.
The yen typically rises when demand falls for so-called carry trades, where investors borrow in currencies with low interest rates and buy assets in nations with higher rates. Japan's target rate of 0.5 percent is 550 basis points below Australia's and 325 basis points less than the euro region's.
Carry Trades
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.
The yen rose 7 percent this week against the dollar, the biggest gain since October 1998. It surged 14 percent against the euro, the biggest weekly advance since the 15-nation currency's 1999 debut. The euro headed for a 6 percent decline versus the dollar.
The Australian dollar fell 7.1 percent to 60.54 yen from late yesterday in New York. The New Zealand dollar declined 5.6 percent to 54.66 yen. The two currencies are favorites for carry trades. Financial-market moves risk erasing those profits.
Financial Turmoil
Volatility on one-month dollar-yen options, a measure of expectations for future price swings, rose to 28.14 percent, the highest since Oct. 13, indicating greater risk market moves may cut carry trade profits. It rose 32.175 percent on Oct. 10, the highest since Bloomberg began compiling data in December 1995.
Coordinated rate cuts by major central banks on Oct. 8 and financial system bailouts in the U.S. and Europe have failed to revive stock markets or encourage banks to resume lending.
The MSCI World Index of shares lost 2.7 percent. The index has plunged 44 percent in 2008 as credit-related losses and writedowns topped $660 billion in the worst financial crisis since the Great Depression. Europe's Dow Jones Stoxx 600 Index fell 4.1 percent, and the MSCI Asia Pacific Index sank 5.8 percent. Futures on the Standard & Poor's 500 Index expiring in December dropped 3.9 percent.
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.
U.K. Economy
The pound fell to $1.5850, the lowest level since September 2003, bringing the week's decline to 8.3 percent, on speculation the Bank of England will lower interest rates to help avert a prolonged recession. Against the euro, the pound weakened to 79.84 pence, dropping for a fifth day, from 79.69 pence.
U.K. gross domestic product contracted 0.2 percent in the three months through September, according to the median forecast from 35 economists surveyed by Bloomberg. Economic output was flat in the previous period. Bank of England Governor Mervyn King said this week he expects a ``sharp and prolonged slowdown'' in demand. 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 U.K. government bonds was at 122 basis points, near the widest since October 1996, a sign traders expect the Bank of England 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 GDP and U.K. banks' loans are around 24 percent of national output, 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 for 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.
The Hungarian forint weakened by 3.5 percent to 222.74 per dollar, near a two-year low of 223.63. The Polish zloty fell 2.8 percent to 3.0857 per dollar.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net Agnes Lovasz in London at alovasz@bloomberg.net
