Yen Falls as Lehman Speculation Boosts Demand for Higher Yields

By Agnes Lovasz and Stanley White

Sept. 10 (Bloomberg) -- The yen weakened on speculation Lehman Brothers Holdings Inc. will survive a credit-market slump, prompting investors to increase holdings of higher- yielding assets funded in the Japanese currency.

The yen fell against the euro for the first time in three days and slid versus the dollar as Lehman rose in German share trading before the bank reports results today. The Australian dollar fell to the lowest in more than a year as declines in gold weighed on the outlook for the commodities exporter.

``We have the Lehman numbers coming out later and one expects that they may have something concrete in terms of restructuring or sell-off news,'' said Jeremy Stretch, senior strategist in London at Rabobank International, the third- largest Dutch bank. ``As the news ebbs and flows, the yen seems to be reflecting the change in sentiment.''

The yen dropped to 151.91 per euro at 9 a.m. in London, down from a one-year high of 150.52 earlier and 150.94 yesterday in New York. It fell to 107.22 per dollar from 106.81. The euro rose to $1.4170 from $1.4133. It reached $1.4047 yesterday, the lowest since October 2007.

Lehman, the fourth-largest U.S. securities firm, said yesterday it will disclose ``key strategic initiatives'' when it reports third-quarter earnings today, a week earlier than planned. Korea Development Bank is in talks to buy more than 25 percent of Lehman for about $6 billion, Yonhap reported today, citing an executive at KDB it didn't identify. The yen pared its declines after KDB said in a subsequent statement it has terminated talks with Lehman.

`Never Say Never'

``It looks at this juncture that the Korean deal is dead but one should never say never in this environment,'' said Stretch.

Lehman rose 36 percent in German share trading today. The stock dropped 45 percent yesterday to the lowest level in a decade as a person familiar with the firm said talks with the Korean firm had broken down.

The yen typically falls when demand for higher-risk assets increases, as traders put on so-called carry trades. In such transactions, investors get funds in a country with low borrowing costs and put them into one with higher interest rates. The risk is that currency market moves erase those profits. Japan's 0.5 percent target lending rate compares with 7 percent in Australia and 8 percent in New Zealand.

Australia's currency dropped to below 80 U.S. cents for the first time since August 2007 before trading at 80.62 cents, from 81.39 cents yesterday in Asia, as the price of gold, the nation's fourth most-valuable export commodity, declined to a 10-month low. Gold futures for December delivery fell as much as 2.7 percent to $770.70 an ounce after reaching $763.20, the lowest since October 2007.

Gold Decline

``The decline in gold is causing a lot of problems for people who were betting on further gains,'' said Hiroshi Yoshida, foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan's fifth-largest publicly traded lender by assets. ``Investors are closing out a lot of bets, and it seems that money is flowing from other currencies into the U.S. dollar.''

The Australian dollar will likely recover after the unwinding of the carry trade ends, said investor Jim Rogers, who correctly predicted the start of the commodities rally in 1999.

``I still own the Australian dollar,'' Rogers told Bloomberg Television. ``I'm not thinking of selling it because if I'm right, the reversal of the carry trade is not going to last forever, it will last for a while.''

The euro also rose against the yen as technical analysis shows that its 9.4 percent decline this quarter is overdone, according to Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo.

Technical Analysis

The euro's 14-day relative strength index against the yen, a comparison of the magnitude of gains and losses, was 18.75. A reading below 30 typically signals a change in price direction is imminent.

``People have been wondering when the markets were going to take a break,'' said Suzuki. ``A bout of risk aversion led to a massive reversal in many trades that pushed down the euro and caused the yen to rise. This move has clearly gone too far.''

The yen also declined against the dollar on speculation Japanese importers sold it for foreign currencies to pay their bills. Many Japanese companies close their accounts on the fifth, the 10th, the 15th, the 20th, the 25th and the last business day of every month. These days are known as ``Gotobi'' in Japanese.

``There were orders from Japanese importers that weighed on the yen,'' said Katsunori Kitakura, chief treasury dealer in Tokyo at Chuo Mitsui Trust & Banking Co., Japan's seventh- largest publicly listed lender. ``The market had been moving in one direction for some time, and it seems some people were waiting to sell into the yen's rally.''

The yen may fall to 107.50 versus the dollar today, he said.

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