Japanese Yen Rises as Credit-Loss Concern Curbs Carry Trades

By Agnes Lovasz and Stanley White

Sept. 9 (Bloomberg) -- The yen rose against the euro for a second day and advanced versus the dollar on speculation credit- market losses will widen, prompting investors to pare holdings of higher-yielding assets funded with Japan's currency.

The yen also traded near a two-year high against the Australian and New Zealand dollars, two favorites of so-called carry trades, amid concern the U.S. government's takeover of mortgage lenders Fannie Mae and Freddie Mac won't halt subprime losses. The U.S. dollar declined versus the euro and the pound.

``Investors have second thoughts on whether everything's fine now and if we're are on a steady path of recovery from the credit crunch and the economic slowdown,'' said Lee Ferridge, a foreign-exchange strategist in London at State Street Global Markets, a unit of the world's largest money manager for institutions. ``Skepticism and risk aversion is a central theme. We'll see high-yielders suffer and the yen come back.''

The yen rose to 152.84 per euro at 10:15 a.m. in London, from 152.96 yesterday in New York. Against the dollar, the yen gained to 107.83 from 108.28. The euro rose to $1.4174 after falling earlier to $1.4047, the lowest since Oct. 9, from $1.4128. The yen may gain to 150 per euro in the coming days, Ferridge forecasts.

The Japanese currency climbed to 87.38 versus the Australian dollar, from 88.39 yesterday. It also advanced to 72.35, from 72.71 per New Zealand dollar.

Wells Fargo

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates. The risk is that currency market moves erase those profits. Benchmark rates are 0.5 percent in Japan, 7 percent in Australia and 8 percent in New Zealand.

Wells Fargo & Co., the biggest bank on the U.S. West Coast, said yesterday it may have to write down most of its $480 million stakes in Fannie Mae and Freddie Mac. Lehman Brothers Holdings Inc. fell almost 13 percent yesterday after analysts at Merrill Lynch & Co. and Oppenheimer & Co. predicted larger writedowns.

The pound rose from near a 2 1/2-year low versus the dollar even after the Royal Institution of Chartered Surveyors said U.K. home prices dropped in August as a squeeze on mortgage lending pushed sales to a record low. Britain's currency has fallen 25 of the past 28 days. It was at $1.7619, from $1.7581. The pound fell versus the euro to 80.45 pence from 80.37 pence.

The dollar wakened for the first time in three days against the yen on speculation U.S. consumer spending will falter as the housing market weakens. Treasury 10-year notes gained yesterday amid speculation the government's rescue of the mortgage financing firms won't reverse the U.S. economic slowdown.

`Not All Roses'

Pending sales of previously owned U.S. homes probably fell 1.5 percent in July after rising 5.3 percent in the previous month, according to a Bloomberg News survey of economists before the National Association of Realtors releases the data at 10 a.m. in Washington.

U.S. retail sales excluding cars and trucks probably dropped 0.2 percent in August, the first decline since February, according to a separate survey, after a 0.4 percent gain in July. The Commerce Department will release the data on Sept. 12.

``You can't say it's all roses for the U.S. dollar,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``There's a very high chance it will continue to fall. The macroeconomic outlook is awful and that won't change anytime soon.''

The dollar may drop to 107.40 yen today, he said.

RBS Cuts Forecast

The euro rose from an 11-month low against the dollar even as a German report showed the nation's trade surplus shrank in July, adding to signs that Europe's largest economy is cooling.

``A narrowing in the trade surplus would be negative for growth because exports are not really improving,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. The euro may still fall to $1.4050 and 150 yen today, Lee said.

Germany's trade surplus narrowed to 13.9 billion euros ($20 billion) in July from 19.7 billion euros in June, the Federal Statistics Office said in Wiesbaden today.

The euro is likely to ``test'' so-called support at $1.3840 against the dollar this week, said Pak Lai Ng, a technical analyst at Forecast Pte in Singapore, citing charts that predict price movements.

Support at $1.3840 is a 50 percent retracement of the euro's rise from the November 2005 low of $1.1640 to the all- time high of $1.6038 in July, based on a series of numbers known as the Fibonacci sequence. The support level also lies on an ascending trend line that began in February 2002, Ng said.

Royal Bank of Scotland Group Plc cut its forecasts for the euro versus the dollar today. The single currency will end the year at $1.40 before weakening to $1.35 by the end of the first quarter of 2009, it said. The bank's previous predictions were $1.50 and $1.45, respectively.

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net