Yen Falls on Speculation Stock Rally to Encourage Carry Trades

November 4, 2008 at 3:41 am Leave a comment

The yen fell against the dollar and the euro as a rally in Asian stocks encouraged investors to step
up purchases of higher-yielding assets financed with the Japanese currency. The yen also weakened versus the Australian dollar, which last month slumped to a record low as frozen credit markets damped demand for so-called carry trades. Regional shares climbed for a fifth day after South Korea pledged extra spending
to help avert a recession and India lowered interest rates for the second time in two weeks. The prospect of rate cuts in Australia and Europe this week also helped drive equities higher.

“The riskier trades are a little bit better bid,” said Gerrard Katz, head of foreign-exchange trading at Standard
Chartered Plc in Hong Kong. “Some of the crosses are performing well” against the yen, he said.

Japan’s currency declined 0.9 percent to 99.36 against the dollar as of 1:45 p.m. in Singapore from 98.46 late in New York on Oct. 31. It dropped 1.8 percent to 127.66 per euro. The dollar weakened to $1.2853 per euro from $1.2726 and dropped to $1.6282 versus the pound from $1.6076.

The yen fell 3.2 percent to 67.83 against the Australian dollar. It reached 55.14 on Oct. 24, the strongest since Australia’s currency started trading freely in 1983. The MSCI Asia-Pacific excluding Japan Index, a benchmark for regional shares, climbed 6 percent. Trading volumes in the foreign-exchange market may be lower than normal today because of a public holiday in Japan.

Interest-Rate Cuts

Economists forecast the Reserve Bank of Australia will cut its benchmark interest rate by a half-percentage point to 5.5 percent tomorrow, after policy makers in the U.S., Japan and China announced reductions last week. The European Central Bank and the Bank of England will reduce their benchmarks by a half-percentage point to 3.25 percent and 4 percent, respectively, at policy meetings on Nov. 6, according to separate Bloomberg surveys of economists.

The yen also weakened after volatility implied by one-month euro options against Japan’s currency declined to 42.29 percent from 43.93 percent on Oct. 31, indicating a lesser risk of exchange-rate fluctuations that may make carry trades unprofitable. Volatility reached 49.62 percent on Oct. 27, the highest level since the common European currency’s debut in 1999.

In carry trades, investors seek higher returns on funds from countries with low-borrowing costs such as Japan, where the benchmark interest rate is 0.3 percent.

‘Poor Economic News’

The dollar fell for the first time in three days against the euro on speculation that growth in the world’s largest economy will slow further, supporting the case for the Federal Reserve to cut interest rates. A report today is forecast to show U.S. manufacturing last month dropped to the lowest level since October 2001.

“I would expect another week of poor economic news that will reinforce the headwinds facing the global economy,” said John Horner, a currency strategist at Deutsche AG in Sydney.

“This is something that should weigh on the dollar” against the yen in particular, he said.
The Institute for Supply Management’s factory index, scheduled for release at 10 a.m. in New York, declined to 41.5 in October from 43.5 the previous month, according to economists surveyed by Bloomberg News. A reading of less than 50 signals contraction. A Labor Department report on Nov. 7 will probably show payrolls fell for a 10th straight month in October, a separate survey showed.

Futures on the Chicago Board of Trade indicate a 55 percent probability the Fed will reduce the target rate to 0.5 percent at its Dec. 16 meeting. The odds a week ago were zero. The rest of the bets are for a quarter-percentage point reduction. – Bloomberg

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