BLBG: Yen Rises to 13-Year High as Investors Exit High-Yield Assets
By 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, posting its biggest gain, after Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the International Monetary Fund. The pound fell below $1.53 in its biggest drop in at least 37 years after the U.K. economy shrank in the third quarter, bringing it to the brink of recession.
``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 91.81 per dollar at 7:23 a.m. in New York, the highest level since Aug. 9, 1995, from 97.31 yesterday. Against the euro, it climbed 9.6 percent to 113.81, the strongest level since May 22, 2002, and the biggest daily gain since the euro's inception in January 1999.
The dollar also headed for its best week ever against the euro, rising to $1.2497, the lowest since October 2006, from $1.2934 yesterday, and $1.3410 a week ago. The pound fell to $1.5269, the lowest level since August 2002. Against the euro, the pound weakened to a record 81.96 pence, from 79.69 pence.
Carry Trades
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.
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 8.9 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 15 percent to 55.13 yen. The New Zealand dollar declined 13 percent to 50.12 yen. The two currencies are favorites for carry trades. Financial-market moves risk erasing those profits.
Financial Turmoil
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.
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 3.6 percent. It has fallen 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 7.1 percent, and the MSCI Asia Pacific Index sank 5.4 percent.
U.S. Stock Futures
Trading in futures on the Standard & Poor's 500 Index and the Dow Jones Industrial Average was limited today after declines in the contracts of more than 6 percent triggered a so- called limit down restriction.
The futures will not trade below 855.20 until U.S. exchanges open for regular trading at 9:30 a.m. New York time, said Jeremy Hughes, a London-based spokesman for the Chicago Mercantile Exchange. Dow Average futures won't trade below the 8,224 level, he said. The ``limit down'' suspension allows both contracts to trade above those levels, he said.
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
U.K. gross domestic product dropped 0.5 percent from the second quarter, the first contraction since 1992, the Office for National Statistics said today in London. Economists predicted a 0.2 percent decline, according to the median of 35 forecasts in a Bloomberg News survey. Growth stalled in the prior three months.
The pound dropped and U.K. stocks fell after the report, which confirmed Prime Minister Gordon Brown's prediction this week that a recession is likely. His government's 500 billion pound ($805 billion) bank rescue package and the Bank of England's half-point rate cut this month, the biggest since 2001, may have come too late to prevent further contraction.
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 3.4 percent to 222.60 per dollar. The Polish zloty fell 3 percent to 3.0922 per dollar.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netAgnes Lovasz in London at alovasz@bloomberg.net
