Yen Gains on Speculation U.S. Mortgage Industry Losses to Widen

By Stanley White and Kosuke Goto

July 8 (Bloomberg) -- The yen rose against the euro on speculation widening U.S. mortgage industry losses will prompt investors to pare holdings of higher-yielding assets funded with the Japanese currency.

The yen also advanced against the Australian and Canadian dollars after an index of commodity prices fell by the most in four months, reducing the appeal of currencies from countries that export raw materials. Lehman Brothers Holdings Inc. said yesterday Fannie Mae and Freddie Mac, the two largest U.S. mortgage financers, may have to raise $75 billion in capital. The South Korean won rose to a two-week high on speculation the government bought the currency.

``Risk reduction is causing yen-buying,'' 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. ``News on the U.S. financial sector is raising an uncertain outlook for the markets.''

The yen gained to 168.20 against the euro at 10:35 a.m. in Tokyo from 168.55 late yesterday in New York. It stood at 107.07 per dollar from 107.18. The euro traded at $1.5715. The yen may rise to 103 per dollar by the end of September, Fukui said.

Japan's currency rose to 102.29 per Australian dollar from 102.52 and to 105.13 against the Canadian dollar from 105.39. The Reuters/Jefferies CRB Index fell 2.8 percent to 460.23, the biggest drop since March 19. The MSCI Asia Pacific Index of regional shares weakened by 0.7 percent.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. Japan's benchmark rate of 0.5 percent compares with 4.25 percent in Europe, 7.25 percent in Australia and 3 percent in Canada.

Won Intervention

The won rose to 1,025.90 per dollar, the strongest since June 20. President Lee Myung Bak yesterday sacked Vice Finance Minister Choi Joong Kyung, in charge of currency policy, after the currency's 11 percent slide in the past year.

``The intervention could be $1 billion or more,'' said Jung Chan Ho, a currency dealer at Shinhan Bank in Seoul. Central banks intervene in currency markets by buying and selling foreign exchange.

The U.S. currency may decline for a third day against the euro before a National Association of Realtors housing report, due at 10 a.m. in Washington. Pending home resales probably fell 3 percent in May, the biggest decline since November, according to a Bloomberg News survey of economists.

Bad News

Citigroup, JPMorgan and Merrill Lynch & Co. report quarterly earnings next week. The world's biggest banks and securities firms have racked up almost $400 billion in writedowns and credit losses since the collapse of the U.S. subprime mortgage market last year, according to Bloomberg data.

``There is likely to be much bad news coming in from the U.S. earning reports,'' said Joseph Kraft, head of capital markets in Tokyo at Dresdner Kleinwort, an investment bank owned by Germany's Allianz SE. ``I expect this month to become dollar- selling, stock-selling and bond-buying markets.''

The dollar may fall to $1.5850 per euro this month, he said.

``The U.S. dollar is a sell,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``When you look at the state of the U.S. economy, the conclusion is that the dollar is a weak currency.''

The dollar may decline to $1.5745 per euro and 106.60 yen today, Soma forecast.

The dollar weakened yesterday as the Standard & Poor's 500 Index dropped 0.8 percent, extending its plunge from an October record to more than 20 percent. Yields on two-year Treasury notes touched the lowest in a month.

Bush, G8

President George W. Bush said on July 6, the first day of his five-day trip to Japan for the Group of Eight summit, that the U.S. ``believes in a strong-dollar policy.'' Leaders from the G-8, including Canada, France, Germany, Italy, Japan, Russia, the U.K. and the U.S., are meeting in Hokkaido, Japan. Central bankers aren't attending the meeting.

The dollar fell 0.6 percent against the euro on June 16 after G-8 finance ministers, meeting without central bankers, stopped short of making a joint comment on currencies.

``It's a gamble to sell'' the dollar before the official communiqué from the meeting, said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto, a unit of Canada's largest bank. ``I would be surprised if we explicitly see a statement that supports the U.S. dollar. But there's a risk that that could happen.''

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netYe Xie in New York at yxie6@bloomberg.net;
Last Updated: July 7, 2008 21:53 EDT