Yen Falls to Record Low Against Euro on Lure of Higher Yield

By Stanley White and Kosuke Goto

June 26 (Bloomberg) -- The yen fell to a record low against the euro on speculation Japanese investors will use summer bonuses to buy overseas assets offering higher yields.

Japan's currency declined for a third day versus the 15- nation euro as traders forecast the European Central Bank will raise interest rates next month as the Bank of Japan keeps its benchmark rate on hold. The dollar was near the lowest in more than two weeks against the euro after the Federal Reserve gave no indication it will increase borrowing costs following yesterday's decision to keep rates at 2 percent.

``Investor outflows could weigh on the yen,'' said Katsunori Kitakura, chief treasury dealer in Tokyo at Chuo Mitsui Trust & Banking Co., Japan's seventh-largest publicly listed lender. ``With no clear guidance from the Fed, that puts the spotlight on the euro. There's no sign of a rate hike in Japan, leaving the yen at a great disadvantage.''

The yen fell to 169.27 per euro, the weakest since the currency's debut in 1999, and traded at 169.21 as of 11:45 a.m. in Tokyo from 168.90 yesterday. Japan's currency stood at 107.98 versus the dollar from 107.80. The U.S. currency traded at $1.5670 per euro after dropping yesterday to $1.5686, the lowest level since June 9. The yen may decline to 170 per euro next week, Kitakura forecast.

Against the Australian dollar, the yen declined to a seven- month low of 103.63 from 103.48 late yesterday in New York. It fell to 213.21 per British pound from 212.93.

Yield Spread

Employees at private companies may get summer bonuses totaling 14.8 trillion yen ($137 billion) in 2008, down 1.8 percent from a year earlier, according to Kazuyoshi Nakata, an economist in Tokyo at Mitsubishi UFJ Research and Consulting Co., a unit of Japan's largest publicly traded lender by assets.

The yield spread on two-year German government debt over similar maturity Japanese government notes widened to 3.72 percentage points from 3.37 percentage points a month ago.

ECB President Jean-Claude Trichet told the European Parliament in Brussels yesterday that he's leaving open the option of raising interest rates again to contain accelerating inflation.

``The ECB will raise rates in July for sure,'' said Takahide Nagasaki, senior currency strategist in Tokyo at Daiwa Securities SMBC Co., a unit of Japan's second-largest brokerage. ``In Japan, it's still hard to do so. The widening interest-rate gap will push down the yen against the euro to 170.''

Traders raised wagers the ECB will increase borrowing costs. The implied yield on the December Euribor futures contract climbed to 5.27 percent from 5 percent at the end of May.

BOJ Rates

Investors reduced bets the BOJ will raise borrowing costs this year. The odds of a Bank of Japan rate increase fell to 37 percent from 92 percent on June 11, interest-rate swaps show.

The dollar was also near a two-week low versus the Swiss franc as traders reduced bets the U.S. central bank will raise its target lending rate by a quarter-percentage point in September. Policy makers said yesterday in the statement announcing the decision to hold the fed funds target at 2 percent that ``uncertainty'' about the inflation outlook remains high.

``The trend is to sell the dollar,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``As worried as the Fed is about inflation, weakness in many parts of the economy means it won't be able to raise rates as soon as it might like.''

The U.S. currency may fall to $1.57 per euro and 107.30 yen today, he forecast.

Fed Futures

Futures on the Chicago Board of Trade show a 66 percent chance the central bank will leave its target rate for overnight lending between banks unchanged at its September meeting, compared with 10 percent odds yesterday. There's a 94 percent chance the Fed will keep rates on hold at the next meeting in August, the contracts show.

Fed Chairman Ben S. Bernanke and his colleagues refreshed their forecasts at their two-day meeting, reporting that the economy keeps expanding. At the same time, crude oil prices have almost doubled in the past year and the cost of commodities from wheat to tin jumped to unprecedented levels.

The Fed's preferred gauge of inflation, which excludes food and fuel costs, was unchanged at 2.1 percent last month, according to the median forecast of 26 economists surveyed by Bloomberg News. The Commerce Department will deliver its report tomorrow. Policy makers including Bernanke have said they prefer core inflation to be below 2 percent.

The U.S. currency has dropped 12 percent against the euro since Sept. 18, when the Fed made the first of seven reductions in the target lending rate. The dollar touched $1.6019 per euro on April 22, the weakest level on record.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net.