Yen Advances as Credit Losses Damp Demand for Higher Yields

By Ye Xie and Gavin Finch

Aug. 19 (Bloomberg) -- The yen rose to a three-month high against the euro as declines in stocks on concern financial firms will post more losses damped demand for higher-yielding assets funded by loans in Japan.

Japan's currency also advanced versus the dollar, New Zealand dollar and the pound after JPMorgan Chase & Co. said Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, may post $4 billion in credit writedowns. The dollar traded near a six-month high against the euro as U.S. wholesale prices increased in July twice the amount forecast.

``We're seeing the yen benefit from an element of risk aversion,'' said Jeremy Stretch, a senior strategist in London at Rabobank International, the third-largest Dutch bank. ``There's still some nervousness about residual financial-market weakness.''

The yen climbed 0.3 percent to 161.30 per euro at 9:42 a.m. in New York, from 161.82 yesterday, after touching 160.87, the strongest level since May 13. The yen advanced 0.3 percent to 109.81 per dollar, from 110.13. The dollar was at $1.4689 per euro, compared with $1.4694, after reaching $1.4631, the strongest level since Feb. 20.

Japan's currency rose 0.3 percent to 77.99 per New Zealand dollar and advanced 0.5 percent to 204.50 versus the pound as concern Lehman writedowns may deepen discouraged the carry trade, in which investors get funds in a country with low borrowing costs and invest where returns are higher.

The Bank of Japan held its target lending rate at 0.5 percent today, the lowest among industrialized countries. The benchmark compares with 5 percent in the U.K. and 8 percent in New Zealand.

Outlook for Lehman

JPMorgan predicted Lehman may lose $3.30 a share in the third quarter, more than three times the average analyst estimate in a Bloomberg survey. Financial institutions have posted more than $500 billion of losses and writedowns since the start of last year, according to data compiled by Bloomberg.

The Standard & Poor's 500 Index dropped 0.3 percent, while Europe's Dow Jones Stoxx 600 slid 2.1 percent. The MSCI Asia- Pacific Index of regional shares lost 2.1 percent.

Banks are being ``crushed by ballooning debts,'' said Tetsuhisa Hayashi, chief manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's largest lender by market value. ``Risk aversion among investors will cause further yen buying,'' driving the Japanese currency to 100 per dollar by year-end, Hayashi said.

Producer Prices

The dollar briefly strengthened versus the euro after the U.S. Labor Department reported that producer prices climbed 1.2 percent in July after increasing 1.8 percent the previous month. The median forecast of 77 economists surveyed by Bloomberg News was for an increase of 0.6 percent.

``The market is seizing on any data that suggest interest rates need to go higher,'' said Stephen Malyon, co-head of currency strategy at Scotia Capital Inc. in Toronto. ``Our view is that inflation won't be a major problem in the medium term. Once the market gets a chance to reflect on that, it should be less dollar-bullish.''

Futures on the Chicago Board of Trade show a 20 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by its Dec. 16 meeting, down from 37 percent odds a week earlier. Policy makers next meet Sept. 16.

Crude oil for September delivery was little changed at $112.78 a barrel on the New York Mercantile Exchange.

BOJ Assessment

The Bank of Japan cut its economic assessment for a second straight month, acknowledging that threats to growth outweigh decade-high inflation as its chief concern. The world's second- largest economy shrank last quarter, putting it on the brink of the first recession in six years.

The revised BOJ outlook ``will place even less pressure on the yen to appreciate in the middle to long term,'' wrote Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former BOJ currency trader, in a research note today.

RBS pushed back its forecast for a BOJ rate increase to the fourth quarter of 2009 from the second quarter, Yamamoto said, confirming the contents of the report.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net