Yen Rises Against Euro, Dollar on Deepening Recession Concerns

By Stanley White

Sept. 5 (Bloomberg) -- The yen climbed to the highest in more than a year against the euro on concern the credit-market slump will lead the world into a recession, prompting investors to sell higher-yielding assets funded in Japan.

The dollar fell versus the yen before a U.S. government report that will probably show employment dropped for an eighth month. The yen also jumped to a two-year high against the Australian and New Zealand dollars as stocks and commodities slumped. The pound dropped for a ninth day versus the dollar.

``This is a global recession story,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender. ``The yen is benefiting as risk appetite is on the decline.''

Against the euro, Japan's currency climbed to 150.60 yen, the strongest since Aug. 17, 2007, before trading at 151.40 yen as of 9:23 a.m. in London, from 153.40 yen. The yen reached 105.69 per dollar, the highest since July 17, before trading at 106.25, from 107.08. The euro fell to $1.4248, from $1.4325. It earlier touched $1.4214, the weakest since Oct. 24. The euro may decline to $1.40 in six months, Umemoto said.

U.S. payrolls fell by 75,000 after declining by 51,000 in July, according to the median estimate of 76 economists in a Bloomberg News survey before the Labor Department report due at 8:30 a.m. in Washington today. The unemployment rate likely stayed at a four-year high of 5.7 percent.

Carry Trades

The Australian dollar dropped to 86.21 yen, from 88.10 yen yesterday, and touched 85.89 yen, the lowest since July 2006. New Zealand's dollar slumped to 70.60 yen, from 72.04 yen, reaching 69.90 yen earlier, the lowest since July 2006. The UBS Bloomberg Constant Maturity Commodity Index reached a seven- month low and Japanese stocks headed for the worst weekly decline in a year.

Japan's currency often gains when demand for higher- yielding assets declines, as traders reverse so-called carry trades. In such trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand.

Volatility implied by dollar-yen options expiring in one- month rose to 13.13 percent, the highest since mid-July, showing market swings may erase carry-trade profits.

``These currency moves are huge,'' said Toru Tokoyoda, head of foreign-exchange sales in Tokyo at Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm. ``Volatility is likely to squeeze higher on further gains in the yen as that would spur demand to hedge against that move.''

One-month volatility may rise to 15 percent provided that the yen rises to 105 per dollar today, he said.

Korean Won

South Korea's won rose 1 percent to 1,117.95, reversing an earlier drop of as much as 1.2 percent, on speculation the central bank is buying the currency to halt its declines. The nation's foreign-exchange reserves fell by $21 billion in the five months through August to $243 billion as the Bank of Korea bought won to try to halt the currency's slide.

A 10 percent drop in the won in the past month sparked concern South Korea may be headed for a repeat of 1997, when the currency lost half its value versus the dollar and the country turned to the International Monetary Fund for a $57 billion bailout to help companies repay overseas debt.

Accelerating inflation and a slowing economy prompted funds including Pictet Asset Management Ltd. and Aberdeen Asset Management Plc to move money out of the country. Speculation that the nation faces a crisis this month are ``groundless,'' said Deputy Finance Minister Shin Je Yoon.

Ruble Gains

Russia's ruble snapped three days of declines after the central bank said it sold a ``significant'' amount of foreign reserves yesterday to prop up the currency. Investors have taken about $30 billion out of Russia since the start of its five-day war with Georgia on Aug. 8, according to BNP Paribas SA.

The ruble rose to 30.3847 against the central bank's dollar-euro basket, from 30.4045 yesterday.

The dollar's 0.4 percent decline against the yen today followed a drop in U.S. asset prices. The Standard & Poor's 500 Index tumbled yesterday by the most in three months.

The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' said Bill Gross, co-chief investment officer of Newport California-based Pacific Investment Management Co., manager of the world's biggest bond fund, on the firm's Web site yesterday.

Juncker Comments

The euro dropped for a seventh day against the dollar, its longest decline since October 2006. The ECB yesterday kept its main refinancing rate at a seven-year high of 4.25 percent and President Jean-Claude Trichet told a press conference growth risks are on the ``downside.''

Europe's currency extended its decline after Luxembourg's Finance Minister Jean-Claude Juncker told reporters yesterday the currency is ``effectively overvalued.'' The euro has dropped more than 10 percent against the dollar from the record high of $1.6038 set on July 15. The ECB lowered its 2008 economic growth forecast yesterday to about 1.4 percent from 1.8 percent.

The U.S. economy is ``stagnant'' and Europe is falling into a recession, said Gail Fosler, president of the New York-based Conference Board, a group known for its consumer confidence survey. Central banks won't have much room to cut borrowing costs amid elevated prices, he said.

Pound's Slide

The pound fell for a ninth day, reaching a two-year low of $1.7538 after the Bank of England yesterday kept its target lending rate at 5 percent. Policy makers judged the fastest inflation in more than a decade outweighed the risk that the British economy is sinking into a recession.

Banks in the U.K., Spain and Ireland that have relied on the ECB for low-cost funding will soon have to pay more. The ECB will increase the so-called `haircut' on most asset-based securities from Feb. 1 to 12 percent from as low as 2 percent, the central bank said yesterday. That means it will lend just 88 percent of the value of the paper.

``The liquidity situation continues to be severe and this could be one reason for the euro to weaken,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``This also focuses attention on the divergence in banks and economies in the euro region.''

The euro may fall to $1.40 this month after breaking below a cloud on its weekly ichimoku chart used to show support levels, he said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net