Yen Declines as Gain in Stocks Spurs Demand for Carry Trades

By Agnes Lovasz and Ron Harui

Sept. 12 (Bloomberg) -- The yen fell against the euro and the dollar on speculation that Lehman Brothers Holdings Inc. will find a buyer, giving investors confidence to purchase higher-yielding assets funded in the Japanese currency.

The yen snapped four days of gains against the euro amid optimism a government-brokered takeover of the New York-based bank will support credit markets. U.S. officials, who are helping Lehman identify potential acquirers, may announce a deal before Asian markets open on Sept. 15, according to a person with knowledge of the matter. The euro rose against the dollar.

The yen dropped to 151.26 per euro as of 8:34 a.m. in London, from 149.98 in New York yesterday, when it reached 147.54, the highest level since Aug. 11, 2006. It fell to 107.54 per dollar from 107.17. The euro rose to $1.4066, after touching $1.3882 yesterday, the weakest since Sept. 18 last year.

``We're seeing a stabilization of risk appetite so near- term gains are developing for euro-dollar and the yen is coming under pressure,'' said Ian Stannard, a London-based currency strategist for BNP Paribas SA, the most accurate currency forecaster in a 2007 survey by Bloomberg. ``Dollar-yen is regaining a little bit of ground and we might see a more sustained move higher developing.''

The U.S. currency dropped to $1.7661 against the British pound from $1.7580, and was at 1.1360 Swiss francs from 1.1381.

Reviewing Books

The U.S. government isn't likely to contribute money in any Lehman deal, the person with knowledge of the matter said. Bankers from other firms were reviewing Lehman's books today, according to people familiar with the matter. They declined to identify potential acquirers.

``There's likely to be a buyer somewhere for Lehman,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``Risk appetite may improve a bit. The yen could be sold.''

The MSCI Asia-Pacific Index of regional shares advanced 0.9 percent after the Standard & Poor's 500 Index rose 1.4 percent yesterday.

Investors increased carry trades, in which they get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits.

The benchmark interest rate is 0.5 percent in Japan, compared with 4.25 percent in the 15-nation euro region, 7 percent in Australia and 7.5 percent in New Zealand, making the yen a popular target for so-called carry trades.

Dollar Index

The ICE's Dollar Index touched 80.375 yesterday, the highest level since September 2007, when the Fed began cutting the target lending rate from 5.25 percent to 2 percent to stave off a recession. The index, a gauge measuring the dollar against the currencies of six U.S. trading partners, reached a low of 70.698 on March 17.

The dollar strengthened beyond 1.80 versus the Brazilian real yesterday for the first time since January and reached $1.7447 against the pound, the strongest level since April 2006.

The dollar has gained more than 12 percent since touching the all-time low of $1.6038 per euro on July 15 as the European economy slumped and crude oil dropped more than 30 percent to $101.38 a barrel from its peak of $147.27.

Industrial output in the 15 nations that use the euro probably fell 0.2 percent in July after a drop of the same amount in the previous month, according to the median forecast of 31 economists surveyed by Bloomberg News. The report from the European Union's statistics office is due today.

``We're looking at a much weaker level for the euro over the next year,'' said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co., in an interview on Bloomberg Television. ``Europe, Japan and Asia can't have strong growth with the U.S. so weak. The decoupling story is a mirage.''

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net