BLBG: Yen Rises to 13-Year High Versus Dollar as Carry Trade Unwinds
By Ye Xie and Agnes Lovasz
Oct. 24 (Bloomberg) -- The yen climbed to a 13-year high against the dollar as a worldwide drop in stocks encouraged investors to dump higher-yielding assets and pay back low-cost loans in Japan.
Japan's currency surged to the strongest in six years against the euro as the prospect of a deepening global recession prompted the unwinding of carry trades. The pound fell below $1.53 after the U.K. economy shrank in the third quarter. The dollar rose to a two-year high versus the euro as investors sought refuge in the greenback.
``It's time to hunker down for the winter,'' said Scott Ainsbury, a portfolio manager who helps manage about $15 billion in currencies at New York-based hedge fund FX Concepts Inc. ``It's a flight to quality. It's an unwinding of leveraged carry trades. Money is going back to dollars.''
The yen rose 2.8 percent to 94.62 per dollar at 4:18 p.m. in New York, from 97.31 yesterday, after touching 90.93, the strongest since August 1995. The yen advanced 5.4 percent to 119.09 per euro from 125.89 and touched 113.81, the strongest since May 2002. The dollar rose 2.7 percent to $1.2580 against the 15-nation euro from $1.2934 after touching $1.2497, the strongest since October 2006.
Japan's currency rose 8.6 percent this week against the dollar, the biggest gain since October 1998. It surged 13 percent versus the euro, the greatest weekly advance ever. The euro headed for a 5.1 percent decline versus the dollar.
Dollar's Gain
The dollar gained against most major currencies on demand for a haven from global turmoil. The greenback rose as much as 3 percent to a four-year high of C$1.2842 versus the Canadian dollar and advanced as much as 4.8 percent to 8.03 Swedish krona, the strongest since December 2005.
``We are in a financial crisis,'' said Richard Clarida, a global strategist at Pacific Investment Management Co. in Newport, California, which has $830 billion in assets under management. ``The flight to quality is boosting the dollar and the yen.''
Emerging-market currencies tumbled after Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the International Monetary Fund. The real dropped 5 percent to 2.3740 against the dollar, the South African rand decreased 1.2 percent to 11.1613 and the Russian ruble fell 1.2 percent to 27.1806.
Weaker Pound
The pound depreciated as much as 5.9 percent to $1.5269, the lowest level since August 2002, after the Office for National Statistics said U.K. gross domestic product dropped 0.5 percent from the second quarter, the first contraction since 1992. Sterling's intraday decline surpassed that on Black Wednesday in September 1992, when the U.K. was driven out of Europe's exchange-rate mechanism. Against the euro, the pound weakened to a record 81.96 pence.
The yen gained 10 percent to 58.62 against the Australian dollar and 9 percent to 52.70 versus the New Zealand currency on speculation the rout in global stocks will encourage investors to unwind trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 6 percent in Australia and 6.5 percent in New Zealand.
The Aussie lost 16 percent versus the yen this week and one third of its value this month. The kiwi declined 18 percent this week and 28 percent in October.
`Market Carnage'
``I've never seen this before in terms of global financial market carnage,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Those who haven't got out of the yen carry trade will have to watch it collapse.''
Volatility on one-month dollar-yen options, a measure of expectations for future price swings, surged to 41.79 percent, the highest since Bloomberg began compiling data in December 1995. Greater fluctuation may cut carry trade profits.
The Standard & Poor's 500 Index dropped 2.2 percent after plunging as much as 6.1 percent, while the Dow Jones Industrial Average fell 2 percent. Trading in futures on the S&P 500 and the Dow was limited after declines in the contracts of more than 6 percent triggered a so-called limit-down restriction. Indexes pared declines after a person briefed on the matter said the U.S. Treasury is considering buying stakes in insurers.
The Nikkei 225 Stock Average declined 9.6 percent to 7,649.08 in Tokyo, a level not seen since April 2003 and just 41 points from the lowest since 1982. Canon Inc., the world's biggest digital-camera maker, and electronics companies Panasonic Corp. and Sharp Corp. plunged more than 12 percent as the surging yen cut the value of overseas sales.
Japan's Economy
Abrupt moves in Japan's currency may hurt the world's second-largest economy, Vice Finance Minister Kazuyuki Sugimoto said. He told reporters in Tokyo that ``we'll carefully watch'' fluctuation in foreign exchange.
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 comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
The dollar has ``little significant support'' versus the yen between today's and the postwar level, wrote Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London, in a research note today.
The yen may appreciate to about 129 against the pound, a level not seen since 1995, wrote Edgeley, who uses charts of historical prices to predict currency moves.
Euro's Vulnerability
The euro and the pound may weaken further because 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.
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 national output, compared with 4 percent for the U.S. and 5 percent for Japan, wrote London-based currency strategists Stephen Jen and Spyros Andreopoulos in a research note yesterday, citing data from the Basel, Switzerland-based Bank for International Settlements.
``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,'' the strategists wrote.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net
