Yen Rises to 12-Week High Against Euro as Carry Trades Pared

By Anchalee Worrachate and Stanley White

Aug. 13 (Bloomberg) -- The yen rose to a 12-week high against the euro and its strongest in two months versus the British pound as Japanese investors cut bets on higher-yielding assets abroad.

Investors pared so-called carry trades on concern the global economy is slowing after a report showed Japan's economy contracted last quarter. The yen climbed to a two-year high against New Zealand's dollar and the strongest in four months versus Australia's as prices of commodities the nations export extended declines. The yen also rose for a third day against the U.S. dollar as financial companies led Asian stocks lower.

``The yen is being driven higher by liquidation of carry trades,'' said Neil Jones, head of European hedge-fund sales in London at Mizuho Capital Markets. ``We are still in a risk- aversion type environment. Also, it's a seasonal story. Japanese investors tend to stop buying foreign currencies at this time of the year, which is a holiday season.''

The yen, which gained against all 16 major currencies tracked by Bloomberg, rose to 161.62 per euro, the strongest since May 21, before trading at 162.36 as of 9:17 a.m. in London, from 163.11 yesterday. Against the dollar, the yen climbed to 108.79, from 109.27. The U.S. currency was at $1.4923 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.

Carry Trades Unwind

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.

Japan's currency advanced to 94.50 per Australian dollar from 96.29, after earlier reaching 93.15, the highest level since April 14. It also rose to 75.55 versus the New Zealand dollar from 75.20, climbing as high as 73.98, the strongest since Aug. 25, 2006.

Stocks declined 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 2.1 percent today and the MSCI Asia Pacific Index of regional shares lost 1.3 percent.

Japanese Holdings

Japanese individual investors have reduced their holdings of the Australian and New Zealand dollars against the yen, Tokyo Financial Exchange data show. So-called net-long positions, speculating on a gain in the Aussie, fell to 89,663 contracts yesterday from 89,908 on Aug. 11, while there were 182,006 similar contracts on the kiwi, down from 187,293. The contracts are denominated in 10,000 units of the foreign currency.

The yen may rise to 160 per euro in the next few weeks, said Masafumi Yamamoto, Tokyo-based head of foreign-exchange strategy for Japan at Royal Bank of Scotland Plc and a former Bank of Japan currency trader.

``Stock-market declines may spread overseas, prompting risk reduction,'' Yamamoto said. ``My colleagues are very bearish on the Australian dollar because of the outlook for commodities.''

Crude oil traded at $113.55 a barrel after falling yesterday to a 14-week low of $112.31. Gold fell for an eighth straight session and copper dropped to a six-month low in New York trading yesterday. Gold and crude oil are Australia's third and fourth most-valuable commodity exports.

UBS AG, the world's second-largest currency trader, raised its dollar forecasts on speculation economic expansion outside the U.S. will slow, prompting interest-rate cuts by central banks.

`Expectations Worsen'

``As growth and rate expectations outside the U.S. continue to worsen, we believe the dollar will continue to firm,'' UBS currency strategists led by Zurich-based Mansoor Mohi-uddin wrote in a research note yesterday.

The dollar may trade at $1.51 per euro in one month and $1.47 in three months, compared with previous forecasts of $1.60 and $1.53, the strategists wrote. The greenback also may buy 110 yen in one month and 111 yen in three months, versus an earlier estimate of 105 yen for both periods, they said.

The dollar may extend its decline versus the yen before a U.S. government report forecast to show consumers are spending less. Retail sales dropped 0.1 percent last month, the first decrease since February, according to the median forecast of 75 economists surveyed by Bloomberg News. The Commerce Department is scheduled to release the report today.

U.S. Economy

Federal Reserve Bank of Dallas President Richard Fisher said the economy will ``broach zero growth'' in the second half of the year, the Dallas Morning News reported yesterday. U.S. gross domestic product rose at an annual rate of 1.9 percent in the second quarter, the Commerce Department said July 31. It fell 0.2 percent in the final three months of last year.

``A disappointing retail-sales number could limit the dollar against the yen,'' said Hiroshi Yoshida, foreign-exchange trader in Tokyo at Shinkin Central Bank. ``This may also cause declines in stocks, which would encourage yen buying as investors avoid risky trades.''

The euro's decline may accelerate on speculation gross domestic product in the 15 countries that share the currency is contracting. It has fallen 0.6 percent against the dollar since Russian troops entered Georgia's separatist region of South Ossetia on Aug. 8, sparking an armed conflict with the former Soviet republic that ended yesterday.

Europe's economy shrank 0.2 percent in the second quarter, following 0.7 percent growth in the previous three months, according to a Bloomberg News survey. The European Union's statistics office in Luxembourg will release the data tomorrow.

European Growth

``The euro-dollar is likely to remain on a weak footing,'' analysts led by Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note yesterday. ``The GDP report would confirm Europe is moving below trend growth, which will, over time, release deflationary forces.''

Traders should sell euros for dollars with a target of $1.46, according to BNP Paribas.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net