Yen Rises as Credit-Market Losses Damp Demand for Higher Yields

By Ye Xie and Gavin Finch

Aug. 21 (Bloomberg) -- The yen rose to the highest level in three months against the euro on concern credit-market losses are widening, reducing demand for higher-yielding assets funded by loans in Japan.

Japan's currency advanced versus all of the other major currencies after the Financial Times reported Lehman Brothers Holdings Inc. failed to sell a 50 percent stake to investors. The dollar traded near its lowest level in a week against the euro before a report forecast to show manufacturing in the Philadelphia region contracted.

``As long as we have uncertainty in the financial sector, the yen is most likely to benefit,'' said Matthew Strauss, senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets.

The yen increased 1.1 percent to 160.25 per euro at 8:42 a.m. in New York, from 162.03 yesterday. It touched 160.20, the strongest level since May 13. The yen rose 1.4 percent to 108.31 per dollar, from 109.86. The dollar fell 0.3 percent to $1.4796 per euro, from $1.4747, after touching $1.4833, the weakest level since Aug. 14.

Gains in the yen accelerated when it went through a so- called key level at 160.87 per euro. Earlier, the Japanese currency advanced after breaking above 109.50 and 109.20 against the dollar and 161.50 per euro, where traders had orders to buy the currency, said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. Traders sometimes place automatic instructions to limit losses in case their bets go the wrong way.

Yen vs. Aussie

Japan's currency advanced to 94.36 per Australian dollar, from 95.97 yesterday in New York. It climbed to 77.28 per New Zealand dollar from 78.33.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread. The risk is currency moves erase the profits.

Japan's target lending rate of 0.5 percent is the lowest among major economies and compares with 8 percent in New Zealand and 7.25 percent in Australia.

The Federal Reserve Bank of Philadelphia's general economic index will be minus 12.6 in August, from minus 16.3 in July, according to a Bloomberg News survey of economists. Readings less than zero signal a decline in manufacturing and that would be the longest contraction since 2001. The report is due at 10 a.m. in New York.

`Complacency'

``The market has been showing a lot of complacency toward dollar-negative news and is now beginning to take a more balanced view of the risks,'' said Michael Klawitter, a currency strategist in Frankfurt at Dresdner Kleinwort, the investment bank owned by Allianz SE, Europe's biggest insurer. ``Ongoing concerns about the health of some U.S. financial institutions are harming the dollar.''

The dollar may fall to $1.50 per euro this week if it weakens below $1.48, Klawitter forecast.

The U.S. currency has gained almost 8 percent versus the euro since touching an all-time low of $1.6038 on July 15 and appreciated 0.8 percent against the yen this month. The greenback has advanced as reports showed the European and Japanese economies shrank in the second quarter and crude oil fell around 20 percent from the record $147.27 a barrel reached July 11.

The 14-day relative strength index of the euro against the dollar was at 25.62, having been below 30 since Aug. 8. A reading below 30 signals Europe's single currency may strengthen.

U.S. `Fundamentals'

``The dollar has been recently heavily overbought despite deteriorating U.S. economic fundamentals,'' said Keiichi Iguchi, a currency dealer in Tokyo at Resona Bank Ltd., a unit of Japan's fourth-largest lender by market value. ``Weaker economic data could spark sharp dollar-selling'' as traders unwind their positions, he said.

The dollar extended an earlier decline today after an industry report showed a composite index of manufacturing and services in the euro region rose unexpectedly in August.

Crude oil today increased 1.7 percent to $117.23 a barrel. The euro-dollar exchange rate and oil 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 move in lockstep.

Futures on the Chicago Board of Trade show an 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- point by its Dec. 16 meeting, down from 35 percent odds a week earlier. Policy makers next meet Sept. 16.

The Labor Department reported today that the number of Americans filing-first time claims for unemployment benefits decreased to 432,000 in the week ended Aug. 16, fewer than forecast, from a revised 445,000 the prior week.

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