By Stanley White
Sept. 1 (Bloomberg) -- The yen rose to the highest in more than four months against the euro as a decline in Asian stocks prompted traders to pare holdings of higher-yielding assets funded in the Japanese currency.
The yen also climbed to the highest in more than a week against the dollar as Hurricane Gustav approached the Gulf of Mexico, halting most oil and natural gas output from the region. The British pound fell to a record low against the euro after Chancellor of the Exchequer Alistair Darling said the British economy faces the worst slump in 60 years. The won declined to the lowest in almost four years as South Korean stocks slumped.
``The yen is rising on a bout of risk reduction,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third-biggest bank. ``Falling stocks make players less inclined to sell the yen. There was also some interest in selling the dollar because the hurricane is bad for the U.S.''
The yen rose to 158.42 per euro, the strongest since April 14, before trading at 158.62 at 7:36 a.m. in London from 159.65 in New York on Aug. 29. Japan's currency climbed to 108.21 per dollar, the strongest since Aug. 21, before trading at 108.37 yen from 108.80. The euro slid to $1.4640 from $1.4673. The yen may rise to 158 versus the euro this week, Ogawa forecast.
Currency trading may be below usual levels because U.S. financial markets are closed today for a public holiday.
South Korea's won fell 2.4 percent to 1,116.10 per dollar. It weakened beyond 1,100 a dollar for the first time since November 2004 as global funds accelerated sales of local stocks and oil refiners bought dollars to pay for crude oil imports.
Carry Trades
The yen advanced versus the Australian and New Zealand dollars, favorites of so-called carry trades. It rose to a five- month high of 92.44 per Australian dollar from 93.36 at the end of last week. It climbed to 75.31 per New Zealand dollar, the strongest in more than two weeks, as the MSCI Asia-Pacific Index of regional shares declined 2.1 percent after U.S. consumer spending slowed in July.
In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The risk is currency moves erase the profits. The Bank of Japan's target lending rate is 0.5 percent compared with 4.25 percent in Europe, 7.25 percent in Australia and 8 percent in New Zealand.
The pound declined to 81.39 pence per euro, the lowest since the single European currency's debut in 1999, before trading at 81.15 pence. It also declined to $1.8006, the lowest since April 2006, and traded at $1.8044 from $1.8211.
`Profound and Long-Lasting'
An economic downturn in the U.K. due to a housing slump would be ``profound and long-lasting,'' Darling said in an interview with the Guardian newspaper on Aug. 30. The next day Darling said he was referring to global conditions, the Sunday Telegraph reported.
The pound also declined as U.K. house prices fell by the most since at least 2001 in August, according to a report released today by Hometrack Ltd.
The Bank of England will keep interest rates unchanged at 5 percent on Sept. 4, according to a Bloomberg News survey of economists. Traders are paring bets on higher borrowing costs in the U.K. The implied yield on the March short-sterling futures contract fell to 5.185 percent on Aug. 29 from 5.45 percent at the end of July.
``Darling painted a pretty dismal picture of the U.K. economy, prompting some speculation of a rate cut,'' said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. ``We're in uncharted territory.''
The pound may fall to $1.80 in coming weeks, she said.
Hurricane Gustav
The dollar slid to the lowest in more than a week against the yen on speculation a rise in oil prices will harm the economic outlook for the world's largest energy consumer.
Crude oil for October delivery rose 0.8 percent to $116.39 a barrel. Prices are up 21 percent this year. Hurricane Gustav will make landfall as a ``major'' hurricane later today, the U.S. National Hurricane Center said.
The dollar fell to a fourth-month low versus the euro and the lowest in more two months against the yen after Hurricane Katrina struck Louisiana on Aug. 29, 2005, causing more than $80 billion in damage.
``If we do go above $120 a barrel and hold that for several days, that would create a little bit of pain for the U.S. dollar,'' John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney, said in an interview with Bloomberg Television.
ECB
The euro fell against the dollar on speculation European Central Bank policy makers will acknowledge that the euro-zone economy is weakening, making an rate increase less likely.
The ECB will leave its benchmark rate at 4.25 percent on Sept. 4, according to a Bloomberg News survey. Business confidence in Germany, Europe's largest economy, slumped last week, adding to concern the euro-zone will fall into a recession.
The implied yield on the Euribor futures contract expiring in September 2009 fell to 4.485 percent from 4.49 percent on Aug. 29. The yield averaged 18 basis points above the ECB rate from 1999 to August 2007.
``The euro has the potential to weaken,'' said Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly listed bank. ``ECB members may try to maintain a hawkish stance, but they'll have to lower their assessment of the economy.''
The ECB may cut rates in the fourth quarter and the euro may decline to $1.45 in six months, he said.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net
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