By Stanley White and Ron Harui
Sept. 16 (Bloomberg) -- The dollar slumped to a two-month low against the yen on speculation the Federal Reserve will cut the target lending rate today after Lehman Brothers Holdings Inc. filed for bankruptcy.
The yen jumped to the highest in more than two years against the Australian and New Zealand dollars as investors pared holdings of higher-yielding assets funded with Japan's currency on concern credit losses will widen. A measure of the greenback against the currencies of six major trading partners fell for a third day after U.S. stocks tumbled the most since the September 2001 terrorist attacks.
``Dollar selling is all but unavoidable,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``A rate cut is likely because the Fed needs to do something to stabilize the financial system. Risk aversion will also help the yen rise.''
The dollar traded at 104.17 yen at 9:41 a.m. in Tokyo from 104.66 yesterday. It earlier touched 104.13 yen, the lowest level since July 16. The dollar gained to $1.4231 per euro from $1.4243. The pound declined to $1.7931 from $1.8007. The dollar may weaken to 103.90 yen today, Soma forecast. Japan's currency rose 0.7 percent to 148.14 per euro.
The yen also gained 1.9 percent to 83.25 versus the Australian dollar and 1.2 percent to 68.38 against the New Zealand dollar as investors reduced so-called carry trades, in which they borrow in countries with low borrowing costs and buy higher-yielding assets elsewhere. The risk is that currency market moves erase those profits.
Carry Trades
Japan's 0.5 percent target lending rate compares with 4.25 percent in Europe, 7 percent in Australia and 7.5 percent in New Zealand.
``The yen is appreciating as risk aversion rises and carry trades are unwound,'' said Besa Deda, acting chief economist at St. George Bank Ltd. in Sydney, in a research note today. ``The Australian dollar should remain under pressure, especially on the cross rates.''
Lehman filed for the biggest bankruptcy in history after Bank of America Corp. and Barclays Plc pulled out of talks to buy the New York-based bank. Bank of America, the biggest U.S. consumer bank, instead agreed to acquire Merrill Lynch & Co. for about $50 billion, as the credit crisis claimed another of America's oldest financial companies.
`Hard to Top'
``It's hard to imagine anything more cataclysmic than this,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``It will be hard to top that kind of news flow. The yen hasn't looked so good for quite a while.''
American International Group Inc., the largest U.S. insurer by assets, may be propped up by $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co. after it was turned away by the Fed, according to people familiar with the situation.
The ICE future exchange's Dollar Index, a measure of the greenback's strength versus the currencies of major trading partners, slid 0.3 percent to 78.673.
Futures on the Chicago Board of Trade showed yesterday a 74 percent chance the central bank will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point today, compared with no chance a week ago.
Policy markers are scheduled to announce their decision at 2:15 p.m. in Washington. One hundred of 105 economists surveyed by Bloomberg News expected the Fed to keep the rate on hold, while the rest forecast a cut.
Implied volatility on one-month euro-dollar options surged to 14.34 percent yesterday, the highest level since the aftermath of the Sept. 11, 2001, terrorists attacks, indicating traders see more price fluctuation in the next month.
Treasury Rally
The dollar rose 1.9 percent to 1.8149 Brazilian real yesterday and 1.4 percent to 10.7437 Mexican pesos as U.S. investors repatriated capital and bought Treasuries.
``The vicious cycle of the credit crunch causing a slowdown in the U.S. economy will continue,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third- biggest lender. ``For the dollar, there will be a flight to quality into Treasuries.''
A rally in Treasuries pushed the yield on the two-year note down 0.42 percentage point to 1.78 percent yesterday, the most since the Sept. 11 attacks. It was the first time the yield fell below 2 percent since April. The 10-year note's yield dropped 0.20 percentage point to 3.52 percent.
The yield advantage of the benchmark 10-year note over comparable-maturity Japanese government securities decreased to 1.90 percentage points yesterday, the narrowest since 1993, making the U.S. securities less attractive.
Stocks Slide
Stocks tumbled yesterday, with the Standard & Poor's 500 Index dropping 4.7 percent. The Dow Jones Stoxx 600 Index of European shares retreated 3.5 percent.
The dollar has gained about 12 percent since touching an all-time low of $1.6038 per euro on July 15 as the European economy slowed and crude oil dropped 35 percent from its peak of $147.27 a barrel.
`` The appetite for the U.S. dollar has not reversed,'' said Jack Spitz, a managing director of foreign exchange at National Bank of Canada in Toronto. ``Risk reduction provides support.''
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netRon Harui in Tokyo at rharui@bloomberg.net
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