Yen Climbs After Moody's Raises Japan's Local-Currency Rating

By Stanley White and Kosuke Goto

June 30 (Bloomberg) -- The yen rose, paring its biggest quarterly decline against the euro in five years, after Moody's Investors Service raised Japan's local-currency debt rating.

The yen pared a daily decline of as much as 0.3 percent after Moody's said Japanese banks had avoided the worst effects of the credit crisis. The yen also reversed losses against the Australian dollar and the British pound on speculation stock losses in Tokyo will spread to Europe, prompting a reduction in purchases of higher-yielding assets funded with Japan's currency.

``Some people in Europe are taking advantage of the Moody's news to buy the yen,'' said Akio Shimizu, chief manager of foreign exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``Sentiment is leaning toward yen buying as traders look to reduce risk. People wary of stocks may also buy yen.''

The yen traded at 166.85 against the euro at 7:24 a.m. in London from 167.58 late in New York on June 27 and 157.40 on March 31. Against the dollar, it was at 105.66 from 106.13 last week and 99.69 last quarter. The dollar was quoted at $1.5792 against the euro, after falling to $1.5797, the lowest since June 9. The yen may rise to 105.50 today, Shimizu said.

The yen advanced to 101.79 per Australian dollar from 101.99 in New York and to 210.67 against the British pound from 211.73. The Aussie, as Australia's currency is known, climbed to 96.33 U.S. cents from 96.10 cents as prices of commodities the nation exports rose to records.

Futures on the Dow Jones Euro Stoxx 50 Index, a benchmark for the euro region, slid 12 to 3,358 following the Nikkei 225 Stock Average's decline for an eighth day.

In carry trades, investors get funds in a country with low borrowing costs and purchase assets where returns are higher. Japan's target lending rate of 0.5 percent, is the lowest among industrialized countries.

Moody's Upgrade

Japan had its rating raised one level to Aa3 by Moody's, which said the government will keep trying to restrain spending to reduce debt. Japanese Prime Minister Yasuo Fukuda last week reaffirmed his pledge to balance the budget by 2011 so that the government can cut the world's largest public debt.

``News on Moody's upgrade was a big surprise, triggering yen-buying,'' said Yuji Saito, head of foreign-exchange sales at Societe Generale SA in Tokyo. Even so, he added, ``we Japanese think the Fukuda administration is reluctant to cut spending and the Japanese economy is slowing.''

The yen may rise to 105.60 a dollar today, Saito said.

BOJ Tankan

Gains in the yen may be limited by speculation the Bank of Japan will keep interest rates on hold, while the European Central Bank prepares to raise borrowing costs.

The Bank of Japan's Tankan index of sentiment, due tomorrow at 8:50 a.m. in Tokyo, will slide for a third straight quarter to 3 points in June, the lowest in almost five years, from 11 in March, a Bloomberg News survey showed. A positive number means optimists outnumber pessimists.

Japan's central bank will keep its target lending rate at 0.5 percent through September 2009, a Bloomberg News survey of economists showed. Benchmark rates are 7.25 percent in Australia and 12.25 percent in Brazil.

``With Japan's interest rates still very low, there is no catalyst for yen-buying,'' said Koji Fukaya, a senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``The yen may fall to 110 a dollar in two months.''

Group of Seven

The dollar headed for a 6.5 percent quarterly gain against the yen, its biggest since December 2001, after finance ministers from the Group of Seven nations said on April 11 they were concerned about the impact of ``sharp fluctuations in major currencies.'' The euro was little changed against the dollar this quarter after rising 8.2 percent the previous three months.

Investors should avoid the dollar ``at all costs,'' said Jim Rogers, chairman of Rogers Holdings. Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, made the comments in a speech in Shanghai today.

The dollar was near a three-week low against the euro before a reports this week that may show declines in payrolls and manufacturing, limiting the Federal Reserve's scope to reverse seven interest-rate cuts since September.

U.S. nonfarm payrolls shrank by 60,000 workers, according to a Bloomberg News survey before the Labor Department's report on July 3. That would follow a decline of 49,000 in May.

U.S. Economy

The Institute for Supply Management's factory index due tomorrow fell to 48.6 in June from 49.6 in May, a separate survey showed. A reading below 50 signals contraction.

``U.S. economic data simply don't support the case for a rate hike,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``With the ECB likely to raise rates, that makes the euro seem more attractive.''

The dollar may fall to 106.10 yen and $1.5840 per euro today, he said.

Futures on the Chicago Board of Trade show a 25 percent chance that the Fed will raise the target rate for overnight lending between banks by a quarter-percentage point to 2.25 percent on Aug. 5, compared with 40 percent odds a week ago.

The euro was supported by speculation a report today will show price increases accelerated in June, allowing ECB President Jean-Claude Trichet to raise interest rates.

The inflation rate in the euro area rose to 3.9 percent, from 3.6 percent in May, the European Union statistics office in Luxembourg may say today, according to a Bloomberg survey. The ECB aims to keep consumer-price growth below 2 percent.

``The euro remains firm ahead of the ECB meeting,'' said Masaki Fukui, a senior economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded financial group. ``The ECB may raise rates beyond July, possibly in September or October.''

Europe's single currency may move between $1.56 and $1.60 against the dollar this week, Fukui said.

Columbian Peso

The Columbian peso's five-year, 49 percent rally is leading to mounting job losses in South American country's export industry and is threatening President Alvaro Uribe's greatest achievements: the fastest economic expansion in three decades and victories over guerrillas.

``The concern is that people lose jobs and have no other alternatives in the legal economy,'' said Javier Diaz, head of the National Exporters Association in Bogota. ``And then the drug trade becomes their only alternative.''

Colombian central bankers announced on June 20 a plan to buy $20 million a day in the currency market. The move sparked an 11 percent decline in the peso last week to 1,888.4 per dollar, paring the peso's advance this year to 6.8 percent.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net
Last Updated: June 30, 2008 03:17 EDT