BLBG: Yen Falls as Rate Cuts, Stock Rally Boosts Higher-Yield Demand
By Ye Xie and Lukanyo Mnyanda
Oct. 30 (Bloomberg) -- The yen declined against the dollar as global interest-rate cuts sparked a rally in stocks, boosting demand for higher-yielding assets funded by loans in Japan.
Japan's currency traded near a one-week low versus the euro on bets the Bank of Japan will reduce borrowing costs tomorrow. The dollar dropped the most in a decade against South Korea's won and declined versus currencies of Brazil, Mexico and Singapore as the Federal Reserve agreed to provide $30 billion to each of the countries.
``The market is getting benefits from all the positive measures the central banks are taking,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``I see risk appetite improving in a choppy fashion in the coming month and some moderate weakness in the dollar and the yen.''
The yen dropped 0.6 percent to 97.92 per dollar at 11:33 a.m. in New York, from 97.39 yesterday. The euro traded at 126.30 yen, compared with 126.26. It has gained 9 percent in three days. The dollar gained 0.6 percent to $1.2892 per euro from $1.2963 yesterday. The U.S. currency touched $1.3292, the weakest level since Oct. 21.
The dollar declined as much 12.6 percent to 1,246.50 won, the biggest decline since December 1997, after the Fed agreed to provide South Korea with a $30 billion swap line, helping ease a shortage of greenbacks among banks and companies. The U.S. currency advanced two days ago to a decade high of 1,495.95 won as mounting risk aversion prompted investors to dump emerging- market assets.
Singapore's Dollar
Against Singapore's dollar, the U.S. currency dropped as much as 2.1 percent to S$1.4579, the biggest intraday slide since September 1998. The dollar decreased 0.8 percent to 2.1160 Brazilian reais and 0.7 percent to 12.8279 Mexican pesos.
Stocks rallied worldwide. The Standard & Poor's 500 Index rose 1.1 percent, and Japan's Nikkei 225 Stock Average climbed 10 percent.
U.S. policy makers reduced the fed funds target by a half- percentage point to 1 percent yesterday, matching a level reached in June 2003 and during the Dwight Eisenhower administration in the late 1950s.
The Fed has cut its benchmark rate from 5.25 percent in the past 13 months and created six lending programs channeling more than $1 trillion into the financial system to limit the severity of a looming recession. Gross domestic product shrank 0.3 percent in the third quarter, its biggest decline since the 2001 recession, the Commerce Department reported today.
``The easing bias in the U.S. is going to continue,'' said Paresh Upadhyaya a portfolio manager in Boston at Putnam Investments, which manages $50 billion in currency assets.
Australian Dollar
The Australian dollar rose 0.2 percent to 66.96 U.S. cents on speculation a rate cut in China, the world's largest consumer of industrial metals, will boost demand for Australia's exports.
The People's Bank of China reduced its benchmark one-year lending rate to 6.66 percent from 6.93 percent yesterday. Taiwan's central bank followed suit today, lowering the discount rate on 10-day loans to banks to 3 percent from 3.25 percent.
The yen fell 0.8 percent to 65.57 versus the Australian dollar and 1 percent to 57.55 against the New Zealand dollar on speculation investors will sell Japan's currency to buy assets in countries where interest rates are higher. Interest rates are 0.5 percent in Japan, 6 percent in Australia and 6.5 percent in New Zealand.
The yen also declined as investors speculated that the Bank of Japan will cut borrowing costs tomorrow. It slumped the most since 1974 versus the dollar on Oct. 28 after the Nikkei newspaper said policy makers are leaning toward lowering rates.
Group of Seven
The Group of Seven industrial nations expressed concern on Oct. 27 about the yen's ``excessive volatility,'' and Japan's Finance Minister Shoichi Nakagawa said that day that the government was ready to act if needed to limit its recent gains.
Implied volatility on one-month dollar-yen options dropped for a third day, declining to 29.93 percent, indicating traders see fewer price swings in the coming month. The gauge surged to 41.79 percent on Oct. 24, the highest since Bloomberg started to compile the data in 1995.
``Selling orders for the yen are piling up,'' said Mitsuru Sahara, senior currency sales manager in Tokyo at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender. ``Stocks are looking strong, and that takes some safe- haven flows away from the yen. A possible BOJ rate cut is also a negative.'' The yen may fall to 99.79 per dollar today, he said.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
