Yen Rises a Second Day as Widening Debt Losses Curb Carry Trade

Yen Rises a Second Day as Widening Debt Losses Curb Carry Trade

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4MBGOWVOq4M&refer=home

By Stanley White and David McIntyre


Aug. 1 (Bloomberg) -- The yen gained for a second day versus the euro on concern losses from U.S. mortgages will prompt investors to cut riskier investments paid for by loans in Japan.

Traders reduced so-called carry trades, pushing up the yen versus 14 of the 16 most-active currencies, as a U.S. equities decline extended to Asia. Macquarie Bank Ltd., Australia's largest securities firm, became the latest finance company to announce fund losses, causing the yen to extend a 4 percent gain in the past six weeks.

``This has the feel of being a bit more serious, given this may reduce liquidity to the equity market on a more permanent basis,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. ``You'll see further near-term weakness in the carry trade and strength in the yen.''

The yen rose to 161.54 per euro at 1:41 p.m. in Tokyo from 162.30 late in New York yesterday. It traded at 118.32 per dollar from 118.61. The yen advanced 2.7 percent last month versus the 13-nation currency, the most since February 2006, and 3.8 percent against the dollar, the biggest increase since October 2004.

The Australian and New Zealand dollars, favorites of carry trades with benchmark interest rates as much as 7.75 percentage points higher than Japan's, also declined against the yen. Australia's dollar slid 0.5 percent to 100.54 and New Zealand's dropped 0.7 percent to 89.75 yen.

Land Mines

``Yen-buying will continue,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Co. Ltd., a unit of Japan's largest brokerage. ``Land mines of troubled subprime issues are ubiquitous.''

The yen may rise to 118 per dollar today, Amikura said. It may be difficult to gain further as traders sell to protect options that would become worthless beyond that level, he said.

The risk-reversal rate on one-month yen options widened to minus 2.3 percent from minus 2 percent yesterday, showing a higher premium for dollar puts, which grant the right to sell the U.S. currency, versus calls, giving the right to buy.

South Korean Finance Minister Kwon Okyu said he wants to discuss yen carry trades at an Asia-Pacific Economic Cooperation summit starting today in Australia, according to CNBC. Kwon also said a strong won hurts his economy, which competes in export markets with Japan, CNBC reported. The won has climbed 18 percent against the yen in the past two years.

Difficult to Criticize

``I don't expect APEC to take any action, because the trend in the currency market is to buy the yen,'' said Norihiro Tsuruta, chief strategist of global investment research at Shinko Research Institute in Tokyo. ``South Korean officials don't like to see a weak yen making their exports less competitive. Many South Korean financial institutions are using carry trades, so it's difficult for Kwon to criticize Japan.''

The yen may rise to 116.30 per dollar this month, he said.

The Nikkei 225 Stock Average fell for a second day, by 2 percent and the Morgan Stanley Asia-Pacific Index of shares snapped two days of gains, dropping 2.6 percent.

Bear Stearns Cos., manager of two hedge funds that collapsed last month due to losses on securities related to subprime loans, has halted redemptions from a third fund after investors demanded their money back. The yen has gained 4 percent against the dollar since Bear Stearns said June 22 it had to bail out one of its money-losing funds. Standard & Poor's said it may downgrade an additional $1 billion of collateralized debt obligations.

Practically Unavoidable

``Yen buying is practically unavoidable,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. ``Declines in Japanese and U.S. stocks hurt sentiment for yen carry trades. Negative news about the credit market is making people more prone to shun risk.''

The yen may rise to 118 against the dollar today, he said.

Credit-default swaps based on $10 million of bonds in the benchmark CDX North American Investment-Grade Index jumped $9,000 to about $81,000, reversing a drop of the same amount, according to Deutsche Bank AG.

The carry trade has weakened the yen against 12 major currencies this year as investors took advantage of Japan's 0.5 percent borrowing cost, the lowest among industrialized nations. The rate compares with 4 percent in the euro region, 5.25 percent in the U.S. and 5.75 percent in the U.K..

Losses in the dollar may be limited as concern over credit risks prompts some investors to seek the safety of U.S. government debt. Treasuries rose, pushing the 10-year yield to the lowest since May 16.

``There's growing worry about credit globally,'' said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. ``There's some flight-to-quality buying of Treasuries. It's supportive of the dollar,'' which may rise to $1.3600 per euro and 119.00 yen today, he said.

The yield on the 10-year note fell 2 basis points, or 0.02 percentage point, to 4.72 percent, according to bond broker Cantor Fitzgerald LP.