Yen Trades Near Three-Month High Versus Euro as Investors Cut Carry Trades

Yen Trades Near Three-Month High Against Euro as Stocks Decline

http://www.bloomberg.com/apps/news?pid=20601101&sid=aSVcG0XndlLQ&refer=japan

By Kosuke Goto and Stanley White


Japanese yen notes are arranged for a photograph July 30 (Bloomberg) -- The yen traded near a three-month high against the euro as a slump in global stocks caused traders to repay Japanese currency loans used to fund higher-yielding investments.

The appetite of investors for so-called carry trades was also curbed as Japanese equities fell after the ruling coalition of Prime Minister Shinzo Abe lost upper house elections. The yen gained to a two-month high against both the Australian and New Zealand dollars.

``This is all about risk reduction, causing the unwinding of the yen carry trade,'' said Kenichi Yumoto, a senior currency dealer at Societe Generale SA in Tokyo. ``Investors are betting stock prices will fall due to the political uncertainty.''

The yen reached 160.67 against the euro, the highest since April 24, before trading at 161.58 as of 1:31 p.m. in Tokyo from 161.67 in New York on July 27. It rose for a seventh day against the euro, the longest winning streak since Aug. 26, 2003. It also gained to 118.53 per dollar from 118.63, after climbing to 118.03.

Japan's currency may advance to 160 per euro and 117.50 per dollar today, Yumoto said.

Prime Minister Abe said he won't resign after losing amid a botched pension system and other scandals. The Liberal Democratic Party and coalition partner New Komeito won 46 of the 121 seats up for grabs, failing to maintain their majority.

Japan's currency reached 100 against the Australian dollar, the highest since May 31, and last traded at 100.68 from 101.03 on July 27. Against New Zealand's currency, it rose as high as 89.27, before trading at 90.26 from 90.78 late last week.

The yen has declined versus all of the 16 most-active currencies this year as the lowest borrowing costs among major economies encouraged carry trades. New Zealand's benchmark rate is 8.25 percent and Australia's is 6.25 percent.

Nikkei 225 Declines

The yen gained 2.2 percent against the dollar and 3.5 percent versus the euro last week as the Nikkei 225 Stock Average tumbled 4.8 percent. The average fell as much as 1.4 percent today.

``The election results could cause a large decline in Japanese stocks, leading to a reduction in risk appetite and yen carry trades,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``Abe says he'll remain in office, but I'm not sure if this is possible. This is a source of political instability.''

The yen may move between 117.50 and 119.70 against the dollar this week, Soma said.

The yen remained higher after a report showed Japan's industrial production increased in June, ending the worst manufacturing slump in almost two years. Production rose a seasonally adjusted 1.2 percent from May, halting three months of declines, the Ministry of Economy, Trade and Industry said in Tokyo today.

Slowing Economy

Any gains in the dollar may be limited by speculation data this week will show slowing U.S. consumer spending, fueling speculation the Federal Reserve will lower interest rates.

Personal spending rose 0.1 percent in June, the least since September, according to a Bloomberg News survey of economists. The Commerce department will release the data at 8:30 a.m. in Washington tomorrow. The dollar has fallen 4.4 percent against the euro since personal spending, which accounts for about 70 percent of the economy, slowed from a five-month high in December.

``I expect the U.S. economy to slow and the Fed to lower rates in the fourth quarter,'' said Kenta Inoue, economist and currency analyst at Mitsubishi UFJ Securities in Tokyo. ``There's still room for rates to rise in Europe, so investors will start to favor European currencies over the dollar.''

The dollar may fall to $.1.37 against the euro this week, he said.

Technical Resistance

The Japanese currency pared gains after it failed to break through 118 per dollar, said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets.

``Traders found it difficult to break through that level, so they started selling the yen,'' said Kato, who predicts the yen may fall to 119 per dollar today.

The 14-day relative strength index for the dollar against the yen was 24.93. A level below 30 is a signal the currency's rally has been too fast.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- so-called net shorts -- was 92,415 on July 24, compared with net shorts of 126,773 a week earlier, according to the Washington-based Commodity Futures Trading Commission.