Yen Advances as Growth Concerns Damp Demand for Higher Yields

By Kosuke Goto and Stanley White

July 1 (Bloomberg) -- The yen rose against the euro and dollar after Australia's central bank said it expects economic growth to slow, eroding demand for higher-yielding assets funded in Japan.

Japan's currency advanced the most against the Australian and New Zealand dollars as speculation UBS AG is likely to incur further asset writedowns in the second quarter reduced demand for so-called carry trades. The dollar traded near a three-week low against the euro on speculation an industry report today will show U.S. manufacturing shrank, adding to pressure on the Federal Reverse to delay raising interest rates.

``People who love yen carry trades against the Aussie are unwinding their positions,'' said Kimihiko Tomita, head of foreign exchange in Tokyo at State Street Bank & Trust Co., a unit of the world's largest money manager. ``The RBA is a little dovish and the trend for rates isn't going higher. People are more selective about carry trades. I'm bullish on the yen.''

The yen rose to 105.94 per dollar as of 8:20 a.m. in London compared with 106.21 late in New York trading. It reached 104.99 yesterday, the highest since June 9. The currency gained to 166.80 per euro from 167.32 yesterday. The dollar was at $1.5748 per euro from $1.5755.

Japan's currency may fall to 103 against the U.S. dollar by the end of this month, Tomita forecast.

Japan's currency climbed to 101.15 against the Australian dollar from 101.81 in New York after the Reserve Bank kept interest rates unchanged at 7.25 percent as it said ``demand growth will be moderate this year.'' The yen climbed against all 16 of the most-traded currencies, rising to 80.59 against the New Zealand dollar from 80.95 and 0.5 percent to 13.4936 per South African rand.

`Across the Board'

``The Australian dollar's sharp decline against the yen triggered yen-buying across the board,'' said Takeshi Tokita, vice president of foreign-exchange sales at Mizuho Corporate Bank in Tokyo, a unit of Japan's second-largest publicly traded lender by assets. Japan's currency may rise to 105 per dollar today, Tokita said.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency- market moves erase those profits.

Japan's benchmark borrowing cost of 0.5 percent compares with 2 percent in the U.S., 8.25 percent in New Zealand and 7.25 percent in Australia. The European Central Bank's key rate is 4 percent.

UBS, the European bank hardest hit by the subprime contagion, yesterday fell to the lowest since October 1998 in Swiss trading amid analysts' estimates for a second-quarter loss on further asset writedowns.

Manufacturing Report

The dollar weakened against the yen before government data this week that may show U.S. manufacturing contracted and employers cut jobs for a sixth consecutive month.

``The dollar has downside risks with upcoming manufacturing data,'' 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. ``With the U.S. economy slowing, we do not expect any rate hike this year.''

The dollar may fall to 98 yen by year-end, Fukui forecast.

Fed Futures

The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, traded at 72.378 from 72.463 yesterday. It fell 0.6 percent last month and gained 0.9 percent in the second quarter. The U.S. currency traded at $1.9944 against the British pound from $1.9923, and was at 1.0186 versus the Swiss franc from 1.0210.

Futures on the Chicago Board of Trade show a 25 percent chance that the Fed will raise the 2 percent target rate for overnight lending between banks by a quarter-percentage point on Aug. 5, compared with 40 percent odds a week ago.

Economists predict the ECB will increase its 4 percent main refinancing rate by a quarter-point on July 3, the same day a U.S. report will show nonfarm payrolls shrank by 60,000 workers last month, according to separate Bloomberg News surveys. That would follow a drop of 49,000 in May.

The U.S. Institute for Supply Management's factory index fell to 48.5 in June, from 49.6 in May, a Bloomberg News survey showed. A reading below 50 indicates contraction. The report is due at 10 a.m. New York time.

Tankan Survey

The yen also gained against the dollar and euro as the Bank of Japan's quarterly Tankan survey showed business confidence among large manufacturers fell less than economists estimated.

The Tankan index of manufacturer sentiment slid to 5 points in June from 11 points in March, a third quarterly decline, the Bank of Japan said today in Tokyo. The median estimate of 32 economists surveyed by Bloomberg was for a drop to 3 points.

``We saw some gains in the yen as the Tankan data support the view that the Japanese economy is doing better than the U.S.,'' said Takuma Kurosawa, global markets treasurer in Tokyo at HSBC Bank, a unit of Europe's biggest lender. ``It's premature to say this will have an impact on the Bank of Japan's thinking on monetary policy.''

Japan's currency may rise to 105.70 against the dollar today, Kurosawa forecast.

Investors see a 33 percent chance Japan's central bank will raise its benchmark interest rate to 0.75 percent by December, according to calculations by JPMorgan Chase & Co. using interest-rate swaps. The odds are down from 34 percent before the Tankan report.

To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.
Last Updated: July 1, 2008 03:21 EDT