Yen Bears Capitulate, Dollar May Rally as Investors Flee Risk

By Lester Pimentel

Sept. 17 (Bloomberg) -- The yen will rally in the next six months as a deepening credit crisis prompts investors to shun higher-yielding assets, a survey of Bloomberg users showed.

Investors are the most bullish on Japan's currency since March as the credit losses that led to the collapse of Lehman Brothers Holdings Inc. mount, according to 3,470 respondents from New York to Paris and Tokyo in the monthly Bloomberg Professional Global Confidence Index. Participants became the most optimistic on the outlook for the dollar since the survey began in November as growth slowed in Europe.

``The Japanese yen is the best place to be,'' said Chris Low, chief economist at FTN Financial in New York and a survey participant.

Of the 16 most-widely traded currencies, only the yen appreciated against the dollar in the past month, gaining 4.51 percent to 105.80 yen. The yen typically gains in times of crisis as traders exit so-called carry trades by selling high- risk assets and repaying loans in countries where interest rates are low. Japan's 0.5 percent target rate compares with 4.25 percent in Europe, 7 percent in Australia and in 13.75 percent in Brazil.

The index of expectations on the yen rose to 64.75 for September from 49.19 in August. A reading above 50 indicates participants expect the currency to appreciate.

Wall Street Turmoil

The survey was taken before Lehman filed the largest bankruptcy in history on Sept. 15 and Merrill Lynch & Co. sold itself to Bank of America Corp. for about $50 billion, triggering the biggest decline in U.S. stocks since the September 2001 terrorist attacks. American International Group Inc.'s credit ratings were cut on Sept. 15, prompting the U.S. government yesterday to take control of the world's biggest insurer in an $85 billion bailout. All the firms are based in New York.

Only the outlook for the dollar exceeds that for the yen. The index measuring sentiment toward the greenback rose to 68.86 from 57.48. The currency has gained about 11 percent to $1.4202 per euro since touching an all-time low of $1.6038 on July 15.

The dollar is attracting more investors and traders as the European economy slows. The Euro-zone economy may grow 1.5 percent this year, compared with 1.7 percent in the U.S., according to the median estimate of strategists surveyed by Bloomberg.

The index for the euro declined to 37.85 from 42.88, while U.K. users increased bets against the pound, with that index falling to 28.67 from 37.73. Both levels are the lowest for those currencies recorded by the survey.

`Holds Up'

``The fact that the dollar holds up relatively well amidst the market turmoil in the U.S. speaks for itself,'' said Jack Spitz, a managing director of foreign exchange at National Bank of Canada in Toronto and a survey participant. ``It's not a domestic U.S. problem any more; this is a global growth problem. Risk aversion and repatriation flows currently dominate the currency market.''

The Federal Reserve left its target rate for overnight loans between banks at 2 percent yesterday and said ``downside risks to growth and the upside risk to inflation are both of significant concern.''

Lower short-term deposit rates can make a country's fixed- income holdings less attractive to international investors, eroding demand for the currency. The dollar depreciated 12 percent against the euro between Sept. 18 and April 30 as the Fed cut its target rate for overnight loans between banks to 2 percent from 5.25 percent and the European Central Bank kept its equivalent unchanged at 4 percent.

The outlook for the Brazilian real tumbled to 40.76, the lowest since the survey began, from 56.25 as investors avoided all but the safest securities. The real is the worst performer among the 16 most-traded currencies against the dollar this month, falling 9.4 percent.

Bond Outlook

Users became less certain 10-year Treasury yields will rise as the sentiment index fell to 59.96, the lowest since April, from 65.26. The yield on the benchmark 10-year note touched a seven-year low of 3.27 percent after Lehman filed for bankruptcy.

In Germany, the index measuring bund yields declined to 46.73 from 53.85, meaning users expect the nation's fixed-income securities to rally. Users in Japan expect yields there to fall, as the index dropped to 47.13 to 50.41. U.K. users became more bullish on gilts, with the index falling to 39.33 from 48.93.

Participants in Switzerland forecast the Swiss National Bank will cut its benchmark rate from 2.75 percent for the first time since April. The index that measures expectations for short-term borrowing costs fell to 42.01 in September from 55.42.

To contact the reporter on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net