Yen Rises Against Euro as Carry Trades Pared on Global Slump

By Stanley White and Ron Harui

Aug. 13 (Bloomberg) -- The yen rose to a two-month high against the euro after a report showing Japan's economy shrank in the last quarter fanned concern about a global slump, prompting the nation's investors to reduce bets on higher- yielding assets overseas.

Japan's currency climbed to its highest in almost a year against New Zealand's dollar and the strongest in four months versus Australia's, as prices of commodities the two nations export extended declines. The yen also advanced for a third day against the U.S. dollar as financial companies led Asian stocks lower, prompting investors to pare so-called carry trades.

``The yen is being bought as Japanese investors are unwinding long positions in higher-yielding currencies,'' said Nobuaki Tani, a currency dealer at Resona Bank Ltd. in Tokyo. ``Concerns over an economic slowdown and the ongoing slide in commodities are spurring them to repatriate those funds.''

The yen rose to 162.36 per euro, the strongest since June 5, before trading at 162.38 per euro at 10:35 a.m. in Tokyo from 163.11 late yesterday. Against the dollar, the yen traded at 108.83 from 109.27. The U.S. currency was at $1.4925 per euro from $1.4926 yesterday, when it reached a 5 1/2-month high of $1.4816.

Japan's economy, the world's largest after the U.S., shrank an annualized 2.4 percent in the three months ended June 30 after expanding a revised 3.2 percent in the first quarter, the Cabinet Office said today in Tokyo. The U.S. economy contracted in the fourth quarter of last year, official figures show.

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, the lowest among major economies. Benchmark rates are 4.25 percent in Europe, 7.25 percent in Australia and 8 percent in New Zealand.

Mortgage Losses

Japan's currency advanced to 94.63 per Australian dollar from 96.29, after earlier reaching 94.38, the highest since April 16. It also rose to 75.36 versus the New Zealand dollar from 76.67, climbing as high as 74.31, the strongest since Aug. 17.

Stocks fell after JPMorgan Chase & Co. said it will write down losses of at least $1.5 billion on mortgage-backed assets this quarter. The Nikkei 225 Stock Average fell 2.2 percent today and the MSCI Asia Pacific Index of regional shares dropped 1.1 percent.

``The yen may remain higher today,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``Stock market declines may spread overseas, prompting risk reduction. My colleagues are very bearish on the Australian dollar because of the outlook for commodities.''

The yen may rise to 160 per euro in the next few weeks, Yamamoto forecast.

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