Yen Declines Most in Three Years Versus Euro on Stock Gains

Yen Declines Most in Three Years Versus Euro on Stock Gains

http://www.bloomberg.com/apps/news?pid=20601087&sid=afa98o8HcYvw&refer=home

By Bo Nielsen and Min Zeng

Aug. 8 (Bloomberg) -- The yen tumbled the most against the euro in almost three years and fell versus the dollar as global stocks advanced after the Federal Reserve said the U.S. economy can withstand a housing slowdown.

The yen also had its biggest decline against the Australian dollar in five months after the Reserve Bank of Australia raised its benchmark rate to an 11-year high, luring money from Japan. Investors added to so-called carry trades by borrowing in yen to purchase higher-yielding assets elsewhere. Global stocks gained.

``The carry rewind is continuing to dovetail the equity markets,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``The Fed said it's not overly concerned about the fallout from the subprime sector. That caused equity markets to rally and people to take on risk.''

Against the dollar, the yen declined 0.8 percent to 119.72 at 11:38 a.m. in New York, from 118.83 yesterday. It fell 1.3 percent to 165.37 against the euro, from 163.25, the biggest one- day drop since Nov. 10, 2004.

The yen fell against all 16 most-active currencies as the Fed yesterday said jobs growth and a ``robust global economy'' will help the U.S. withstand the rout in subprime mortgages.

The ``economy seems likely to continue to expand at a moderate pace,'' the rate-setting Federal Open Market Committee said. A report today showed mortgage applications in the U.S. rose last week by the most since January.

Australian Dollar

The Australian dollar surged 1.5 percent to 103.08 yen after the RBA lifted its benchmark interest rate a quarter-percentage point to 6.5 percent, six percentage points more than Japanese rates. The yield advantage of two-year Australian debt over Japanese government bonds widened to 5.39 percentage points from 5.37 percentage points on Aug. 6.

The dollar fell against the euro as investors, spurred by rising equities, went looking for higher-yielding currencies like the New Zealand dollar. The currency gained 0.7 percent to 76.71 U.S. cents.

``As equities are up, people are interested in carry trade and bidding on currencies like the New Zealand dollar, Australian dollar, Canadian dollar,'' said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG. ``The yen and the dollar lose ground in this environment.''

The U.S. dollar declined against 13 of 16 major currencies.

The Standard and Poor's 500 Index rose 1 percent and the Dow Jones Industrial Average increased 0.6 percent.

Subprime Concern

The U.S. currency has fallen 3 percent against the yen in the past month on concern losses from subprime mortgages will slow economic growth.

``The U.S. subprime problems won't be solved any time soon, as housing prices are still falling,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo. ``This is a continuing correction of the housing market bubble and will keep adversely affecting U.S. consumption,'' pushing down the dollar to 115 yen by year-end.

The euro rose to $1.3811, from $1.3736 yesterday, after a German government report today showed exports gained more than forecast in June, adding to evidence Europe's largest economy is resilient to higher borrowing costs.

The euro may extend this year's 5.2 percent gain versus the yen on prospects the European Central Bank will raise interest rates at a faster pace than the Bank of Japan. The yield spread between two-year German and Japanese bonds was 3.37 percentage points, above the average of 3.13 percentage points in the past year.

`Likely to Hike'

``Growth in the euro area is robust,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``The ECB is likely to hike in September and perhaps once more this year. It's supportive of the euro.''

The Federal Statistics Office in Wiesbaden said Germany's exports rose 2.1 percent from May, when they declined 0.7 percent.

The pound rose against the dollar, snapping two days of losses, after the Bank of England suggested interest rates may have to rise again to curb inflation. The U.K. currency was at $2.0371, from $2.0213 yesterday.

The dollar fell after the U.K.'s Daily Telegraph cited Chinese officials as suggesting the country may sell holdings of Treasuries should the U.S. impose trade sanctions to force a yuan revaluation.

``The news on China is not going to bode well for the dollar,'' Mitul Kotecha, head of currency strategy at Calyon, said in London. ``Any threat that would suggest China would be buying less or selling U.S. securities, given China is a significant buyer of U.S. assets, will get the market a bit edgy.''

China's $1.33 trillion of currency reserves are becoming ``politicized'' as the nation holds trade talks with the U.S., Simon Derrick, The Bank of New York's chief currency strategist in London, wrote in a note dated yesterday. Recent comments from Chinese researchers ``carry an underlying threat,'' he said.