Yen Falls to a Record Low as Stock Rally Fuels Risk Appetite

Yen Falls to a Record Low as Stock Rally Fuels Risk Appetite

http://www.bloomberg.com/apps/news?pid=20601101&sid=a8ZW7jP_xziM&refer=japan

By Stanley White and David McIntyre


Japanese yen notes are displayed for a photograph July 13 (Bloomberg) -- The yen fell to a record low against the euro as a surge in global stocks encouraged investors to borrow the currency to buy higher-yielding assets.

The Japanese yen headed for a second weekly drop as the Nikkei 225 Stock Average rose by the most since May, following a rally in the Dow Jones Industrial Average yesterday. The currency declined against the Australian dollar, a favorite for so-called carry trades because of its 6.25 percent benchmark rate.

``This big rally in the Dow underpins risk appetite,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney. ``So you sell yen against everything.''

The yen dropped to a record low of 168.95 per euro before trading at 168.73 at 1:20 p.m. in Tokyo. The currency was at 122.43 per dollar. It reached a 4 1/2-year low of 124.13 per dollar June 22. The euro traded at $1.3782 against the dollar, compared with an all-time high of $1.3798 yesterday.

The Nikkei rose as much as 1.5 percent, the biggest gain since May 31 and reversing the losses of the past three days. U.S. stocks rose yesterday after Wal-Mart Stores Inc.'s sales and a surge in exports improved prospects for economic growth. The Dow average jumped 2.1 percent to a record.

``Stock prices are stabilizing, pushing down the yen against the crosses, such as the euro,'' said Masashi Kurabe, currency manager at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. ``Japan's absolute rate disadvantage still matters.'' The yen may fall to 169.20 per euro and 122.90 against the dollar today, Kurabe said.

Australian Dollar

Against the Australian dollar, the yen dropped to 106.23 from 106.05, extending declines since the Bank of Japan kept its overnight lending rate at 0.5 percent yesterday, the lowest among major economies.

The yen pared losses against New Zealand's dollar to 96.06 after that country's central bank said it will hold a portion of foreign-exchange reserves unhedged to make it easier to intervene. The Reserve Bank of New Zealand sold its currency June 11 after it rose to a 22-year high.

Japan's rate compares with New Zealand's 8 percent and 4 percent in the euro region. The yen has lost 26 percent versus the New Zealand dollar, 18 percent against Australia's and 13 percent versus the euro in the past 12 months.

Investors see a 66 percent chance of an August rate increase in Japan, according to Credit Suisse Group calculations based on the exchange of interest payments. The odds were 75 percent yesterday.

Japanese investors bought 240.6 billion yen ($2 billion) more in overseas bonds than they sold last week, the first net purchase in five weeks, Ministry of Finance data showed yesterday.

``It's very hard to bet against currencies such as the Australian and New Zealand dollars,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. ``It's the Japanese people themselves that appear to be right behind the carry trade.''

Subprime Loans

Any gains in the dollar may be limited after Standard & Poor's and Moody's Investors Service this week said they may cut ratings on securities backed by subprime mortgages, which may increase losses at brokers and hedge funds that bought the debt.

The U.S. currency has dropped 1.1 percent against the euro this week and the Federal Reserve's broad dollar index slid to 102.90 on July 11, the lowest since July 1997. The dollar may fall to 117.50 yen by year-end on speculation a housing slump will increase pressure on the Fed to hold rates, according to Mitsubishi UFJ Securities.

``Because of this lingering subprime issue, the Fed will be forced to keep rates on hold, while other countries are certainly heading for higher rates,'' said Masayuki Kichikawa, a senior economist and currency analyst at a unit of Japan's largest lender by assets. ``This is negative for the dollar for sure.''

Expressing Comfort

The euro may be bolstered by speculation European Union Monetary Affairs Commissioner Joaquin Almunia will today show tolerance for the euro's strength, which helps to alleviate inflationary pressure.

Europe's single currency headed for a fifth winning week against the dollar after Portuguese Finance Minister Fernando Teixeira dos Santos yesterday said the rise to record highs against the dollar and the yen isn't a problem.

``European policy makers are expressing comfort with the euro's gains, given there are still inflation risks,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. ``The bias is for the euro to appreciate'' to $1.3800 and 169.00 yen today, he said.

Almunia will speak on the euro and European competitiveness at the European Policy Centre at 9:30 a.m. in Brussels.