BLBG: Yen Rises as Carry Trade Evaporates on Global Recession Concern
By Lukanyo Mnyanda and Stanley White
Oct. 27 (Bloomberg) -- The yen rose more than 2 percent against the dollar for a second day, trading near a 13-year high, as tumbling stock markets prompted investors to sell higher-yielding assets funded with loans in Japan.
The Japanese currency also strengthened against the Australian and New Zealand dollars, two favorites for the so- called carry trade. The Group of Seven nations said yesterday excessive yen movements may threaten financial stability and Japan's Finance Minister Shoichi Nakagawa said his country is ready to act. The pound slid against the dollar, euro and yen after a report showed U.K. house prices slumped.
``These moves are due to extreme risk aversion, and have further legs,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. ``The credit bubble has truly burst and we're seeing panic selling of risky assets that were bought with yen.''
The yen climbed to 92.43 per dollar as of 9:23 a.m. in London, from 94.32 in New York on Oct. 24, when it touched a 13- year high of 90.93. Japan's currency strengthened to 114.30 per euro from 118.96 at the end of last week, when it reached 113.81, the strongest level since May 2002. The euro fell to $1.2366, the weakest in 2 1/2 years, from $1.2623. The yen may appreciate to about 90 per dollar today, Hardman said.
Monthly Gains
In the past month, Japan's currency has jumped 15 percent against the U.S. currency, 35 percent versus the euro, 58 percent against the Australian dollar and 46 percent versus the New Zealand dollar as traders slashed carry trades. In such transactions, investors get loans in low interest-rate countries to take advantage of higher returns elsewhere. Japan's benchmark rate of 0.5 percent compares with 6 percent in Australia and 6.5 percent in New Zealand.
The MSCI Asia Pacific Index fell 6.1 percent today, bringing its decline in the past week to 17 percent, and Europe's Dow Jones Stoxx 600 Index fell 5 percent as investors bet the credit seizure and mounting bank losses will push the global economy into a recession even as officials attempt to stabilize markets. The International Monetary Fund agreed yesterday to loan Ukraine $16.5 billion and give Hungary ``a substantial financing package'' to shore up their finances.
``We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability,'' the G-7 said in a statement read by Japan's Nakagawa today. Japan urged the G-7 to issue the statement, he said.
Japan last sold its own currency in March 2004. The G-7 comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
Currency Intervention
``The yen's lackluster response is likely because the G-7 stopped short of saying they're ready to conduct actual intervention,'' said Akio Shimizu, chief manager of foreign exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``Officials are clearly worried about an overshoot in currencies. Policy makers may also need to prop up stocks to calm financial markets.''
Australia's central bank bought its currency for a second day. Central banks intervene in foreign-exchange markets when they arrange purchases and sales of currencies.
The central bank ``provided more liquidity to the foreign- exchange market,'' said a spokesman for the Sydney-based RBA, who declined to be identified. The intervention came amid similar circumstances to those during a sale of Australian dollars on Oct. 24, according to the spokesman.
Pound Falls
The U.K. pound fell as London-based Hometrack Ltd. said the average cost of a residential property in England and Wales slipped 7.3 percent from a year earlier. It dropped 3.4 percent versus the dollar to $1.5359 and 2 percent against the euro to 80.86 pence.
The euro stayed lower against the dollar and the yen after a survey by the Ifo institute showed business confidence in Germany, the largest of the 15 economies that share the currency, declined to the lowest level in more than five years in October.
Volatility implied by dollar-yen options expiring in one month, a measure of expectations for future currency moves, rose to 40.81 percent from 35.38 percent on Oct. 24, when it reached 41.79 percent, the highest since Bloomberg began compiling data in December 1995.
``The way the market has been recently, intervention could happen at any moment,'' said Akifumi Uchida, deputy general manager of the marketing unit in Tokyo at Sumitomo Trust & Banking Co. ``That's making some people wary about chasing the yen higher.''
`One-Way Street'
The dollar is reasserting its status as the world's reserve currency as investors seek a haven from plunging emerging-market stocks and bonds. The ICE futures exchange's U.S. Dollar Index, which tracks the greenback against the currencies of six major trading partners, soared to the highest in more than two years. It has jumped 14 percent this year to 87.52 today.
The sell-off in emerging markets may ``set the stage'' for bigger gains, Barclays Capital said. Demand for the safety of Treasuries is turning the foreign-exchange market into a ``one- way street,'' according to Frankfurt-based Deutsche Bank AG, the world's biggest currency trader. BNP Paribas SA, the most- accurate forecaster in a 2007 Bloomberg survey, said the dollar may return to parity with the euro in coming months.
Futures Bets
Futures traders increased bets that the yen will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- rose to 30,121 on Oct. 21, compared with net longs of 29,904 a week earlier.
The dollar also fell against the yen as traders increased bets the Federal Reserve will lower interest rates this week before data that may show the world's largest economy shrank the most since 2001.
Futures on the Chicago Board of Trade showed a 100 percent chance the Fed will cut its 1.5 percent target rate for overnight lending between banks by at least a quarter-percentage point on Oct. 29. Futures showed no chance of lower rates a month ago.
U.S. gross domestic product contracted at a 0.5 percent annual rate in the three months through September, according to the median estimate in a Bloomberg News survey before the Commerce Department releases data on Oct. 30.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net
