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

By Ye Xie and Anchalee Worrachate

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 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 0.9 percent to 161.62 per euro, the strongest since May 21, before trading at 162.07 at 9 a.m. in New York, compared with 163.11 yesterday. Against the dollar, the yen climbed 0.6 percent to 108.61, from 109.27. The U.S. currency was at $1.4928 per euro, compared with $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.

Weaker Pound

The pound extended losses after the Bank of England slashed its economic-growth forecast and said inflation will peak in the third quarter. The British currency fell to $1.8744, the lowest since October 2006, before trading at $1.8752, and to 79.28 pence per euro, from 78.69. Against the yen, it traded at 204.30, from 207.28.

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 95.01 per Australian dollar from 96.29, after earlier reaching 93.15, the highest level since April 14. It also rose to 76.07 versus the New Zealand dollar from 75.20, climbing as high as 73.98, the strongest since Aug. 25, 2006.

Japanese Investors

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.

Crude oil traded at $113.35 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.

Dollar `to Firm'

``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.

Sales at U.S. retailers dropped in July for the first time in five months as record gasoline prices siphoned some of the tax rebates out of consumers' pockets.

The 0.1 percent decrease matched the median forecast and followed a 0.3 percent gain the prior month that was larger than previously reported, the Commerce Department said today in Washington.

Fed's Fisher

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.

The euro's decline may accelerate on speculation gross domestic product in the 15 countries that share the currency is contracting.

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.

The euro's 4.2 percent decline against the U.S. currency since last week may be excessive, Merrill Lynch & Co. said.

``We expected the euro to moderate versus the dollar, but present moves are perhaps extended a step too far in the near term,'' a team of strategists led by New York-based Daniel Tenengauzer wrote in a report.

Merrill said it's holding on to its view that the dollar will strengthen to $1.40 per euro, though not before the first half of 2009.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net;