Yen Rises to Two-Month High on Signs Credit Losses May Spread

By Stanley White and Ron Harui

Sept. 16 (Bloomberg) -- The yen rose to a two-month high against the dollar and the Swiss franc advanced for a third day as American International Group Inc. had its credit ratings lowered, fueling concern that financial turmoil will spread after the collapse of Lehman Brothers Holdings Inc.

The yen jumped to the highest in more than two years against the Australian and New Zealand dollars as a global stocks rout encouraged investors to cut so-called carry trades, in which they fund purchases of higher-yielding assets overseas with Japan's currency. Asian stocks fell the most in eight months and U.S. shares yesterday posted their biggest decline since the September 2001 terrorist attacks.

``Yen gains look set to continue,'' 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. ``News flow from the financial sector is a negative for risk assets and will lead to more downside for carry trades.''

The yen rose to 103.93 versus the dollar at 8:02 a.m. in London from 104.66 late in New York yesterday, breaching the 104 level for the first time since July 16. Yamamoto forecast the currency may strengthen to 102 this week. Against the euro, the yen rose 0.8 percent to 147.92.

The dollar was at $1.4226 per euro from $1.4243 yesterday, when it reached $1.4481, the lowest since Sept. 4. It weakened to 1.1118 against the Swiss franc from 1.1159.

South Korea's won slumped as much as 4.9 percent to 1,166.20 per dollar, a four-year low, on speculation overseas investors will sell more of the nation's stocks and repatriate funds. The Kospi share index dropped 6.1 percent, the most since August 2007.

`End of the World'

The yen gained 2.8 percent to 82.06 versus the Australian dollar and 1.9 percent to 67.67 against the New Zealand dollar as investors reduced carry trades on concern currency-market moves will erase their profits.

Japan's 0.5 percent target lending rate compares with 4.25 percent in Europe, 7 percent in Australia and 7.5 percent in New Zealand. The MSCI Asia-Pacific Index of regional stocks fell 3.7 percent on speculation credit losses will slow global growth.

``It's the end of the world as we know it, at least that is how it feels,'' said Greg Gibbs, a currency strategist at ABN Amro Holdings NV in Sydney. ``The main beneficiary has been the yen, which is not a surprise being the typical risk aversion play and the prospect that Japanese outflow to foreign markets dries up.''

Futures on the Chicago Board of Trade showed a 68 percent chance the Federal Reserve will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point when it meets today, compared with no chance a week ago. Policy makers are scheduled to announce their decision at 2:15 p.m. in Washington.

Yield Spreads

Treasuries extended the biggest rally since the Sept. 11 attacks, pushing the 10-year note's yield down 3 basis points to 3.38 percent. The yield advantage of the benchmark 10-year note over comparable-maturity Japanese government securities decreased to 1.85 percentage points today, the narrowest since October 1993, making the U.S. securities less attractive.

Lehman filed for bankruptcy after Bank of America Corp. and Barclays Plc pulled out of talks to buy the New York-based bank. Bank of America, the biggest U.S. consumer bank, instead agreed to acquire Merrill Lynch & Co. for about $50 billion, as the credit crisis claimed another of America's oldest financial companies.

``It's hard to imagine anything more cataclysmic than this,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``It will be hard to top that kind of news flow. The yen hasn't looked so good for quite a while.''

Currency Volatility

AIG, the largest U.S. insurer by assets, may be propped up by $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co. after it was turned away by the Fed, according to people familiar with the situation. S&P cut the insurer's long-term counterparty rating to A- from AA-.

Implied volatility on one-month euro-dollar options reached 14.46 percent today, the highest level since the aftermath of the Sept. 11, 2001, terrorists attacks, indicating traders see more price fluctuation in the next month. Volatility on one- month dollar-yen options touched 18.28 percent today, the highest since March 19.

The dollar rose 1.9 percent to 1.8149 Brazilian real yesterday and 1.4 percent to 10.7424 Mexican pesos as U.S. investors repatriated capital and bought Treasuries.

``The vicious cycle of the credit crunch causing a slowdown in the U.S. economy will continue,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third- biggest lender. ``For the dollar, there will be a flight to quality into Treasuries.''

The dollar has gained about 11 percent since touching an all-time low of $1.6038 per euro on July 15, sliding as the European economy slowed and crude oil dropped more than a third from its July peak of $147.27 a barrel.

``The appetite for the U.S. dollar has not reversed,'' said Jack Spitz, a managing director of foreign exchange at National Bank of Canada in Toronto. ``Risk reduction provides support.''

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