Yen Rises Against Euro as Carry Trades Pared on Global Slowdown

By Kosuke Goto and Stanley White

Aug. 1 (Bloomberg) -- The yen rose to a two-week high against the euro as faltering global growth and a slump in Asian stocks prompted traders to pare holdings of higher-yielding assets funded in the Japanese currency.

The currency advanced the most versus the Australian and New Zealand dollars, favorites of so-called carry trades, on speculation the nations' central banks will cut interest rates. The euro fell against the dollar after a report today showed German retail sales slumped, undermining the case for the European Central Bank to raise borrowing costs.

``There emerges concern the U.S. slowdown will cause a global recession,'' said Toru Umemoto, chief currency strategist in Tokyo at Barclays Capital Inc., a unit of Britain's third- biggest bank. ``With commodity prices falling, currencies such as the Australian dollar are vulnerable. The yen is being buoyed by risk reduction.''

The yen rose to 167.37 per euro at 7:27 a.m. in London from 168.39 late yesterday in New York. It earlier touched 167.27, the highest since July 17. The dollar weakened to 107.54 yen from 107.91. The euro slid to $1.5564 from $1.5603.

The MSCI Asia-Pacific Index of regional shares dropped 1.6 percent as former Federal Reserve Chairman Alan Greenspan said U.S. home prices are ``nowhere near the bottom.'' A Labor Department report today may show companies cut employees for a seventh month in July.

Carry Trades Reduced

Japan's currency rose to a one-month high of 100.75 per Australian dollar from 101.69 yesterday in New York. It climbed to a four-month high of 78.21 per New Zealand dollar from 79.25.

Daiwa Asset Management Co., which holds 4 percent of the government's bonds, said in an interview last week the rally in the Australian dollar is coming to an end. Mizuho Asset Management Co., State Street Global Advisors and Putnam Investments also turned bearish as the U.S. economic slowdown spread, causing commodity prices to decline.

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan's target lending rate is 0.5 percent compared with 4.25 percent in Europe, 7.25 percent in Australia and 8 percent in New Zealand.

Traders speculated the Reserve Bank of Australia will lower its benchmark rate by 68 basis points, or 0.68 percentage point, over the next 12 months, according to a Credit Suisse Group index based on interest-rate swaps. That's up from 32 basis points at the end of last week.

The Australian dollar may extend losses to 100.25 yen today, based on charts used to predict price movements, said Pak Lai Ng, a technical analyst at Forecast Pte Ltd. in Singapore.

U.S. Slump

U.S. non-farm payrolls dropped by 75,000 last month, following a decline of 62,000 in June, according to a Bloomberg News survey of economists. The Labor Department's report is scheduled to be released at 8:30 a.m. in Washington.

Gross domestic product in the U.S. increased at an annual rate of 1.9 percent in the second quarter, the Commerce Department announced yesterday. Economists predicted 2.3 percent growth, a Bloomberg survey showed. The report also showed that a recession may have begun in the final three months of 2007, as GDP was revised to indicate a contraction in that period.

Futures contracts on the Chicago Board of Trade showed a 32 percent chance the Fed will raise its 2 percent target rate for overnight loans between banks by at least a quarter-percentage point by Sept. 16, down from 38 percent odds on July 30.

``The U.S. labor markets will no doubt remain weak,'' 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 lender by assets. ``This will weigh on the dollar,'' which may fall to 105 yen by Sept. 30, he said.

Oil Link

The U.S. currency gained against the euro after crude oil yesterday fell more than $2 a barrel. The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations based on their value changes. A reading of 1 would mean they moved in lockstep.

``Oil looks quite heavy, and commodities seem to be in a longer-term downward trend,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``It lent some support to the dollar.''

The euro weakened for a fifth day against the yen as consumer demand slowed in Germany, Europe's largest economy.

Retail sales fell 1.4 percent from May, when they rose 0.5 percent, the Federal Statistics Office in Wiesbaden said. Economists forecast a drop of 0.5 percent, the median of 29 estimates in a Bloomberg News survey shows.

``With expectations of a rate hike by the ECB dwindling, the euro is falling,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``There have even emerged expectations of an ECB rate cut.''

Europe's single currency may fall to $1.45 against the dollar by year-end, Fukaya said.

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