Yen Trades Near One-Year High on Signs Credit Losses May Spread

By Stanley White and Ye Xie

Sept. 10 (Bloomberg) -- The yen traded near a one-year high against the euro on speculation credit-market losses will spread, prompting investors to reduce holdings of higher-yielding assets funded with Japan's currency.

Japan's currency also traded near two-year highs against the Australian and New Zealand dollars, favorites of so-called carry trades, as global stocks tumbled after talks between Lehman Brothers Holdings Inc. and potential investor Korea Development Bank broke down. Australia's currency fell to a one- year low versus the greenback as a drop in prices of gold and oil reduced the economic prospects of the commodity exporter.

``The yen is likely to get a boost,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``If a name as big as Lehman is having trouble getting funding, other banks may face a similar situation. In this environment, you can't take on the risk of carry trades.''

The yen was at 151.09 per euro at 8:40 a.m. in Tokyo from 150.94 late yesterday in New York. It earlier rose to 150.52, the strongest since Aug. 17, 2007. Against the dollar, the yen traded at 107.12 from 106.81 yesterday when it gained 1.4 percent. The euro was at $1.4106 compared with $1.4135. The yen may rise to 150.70 per euro today, Soma forecast.

Australia's currency dropped to 79.83 U.S. cents to trade below 80 U.S. cents for the first time since August 2007. It was last at 80.39 cents from 81.39 cents late yesterday in Asia as the price of gold, the nation's fourth most-valuable export commodity, slid to the lowest since November, Raw materials make up 60 percent of Australia's sales overseas.

Crude Oil Falls

The dollar was supported against the euro as crude oil for October delivery decreased 0.5 percent to $102.70 a barrel. Saudi and Venezuelan oil ministers signaled the Organization of Petroleum Exporting Countries will maintain production levels when it meets today in Vienna. Gold futures for December delivery fell 0.4 percent to $774.30 an ounce.

Japan's currency rose to 85.86 per Australian dollar from 87.97. It also advanced 2.4 percent to 71.30 versus the New Zealand dollar.

In a carry trade, investors get funds in a country with low borrowing costs and invest in 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.

`Probably go Under'

Lehman's shares dropped to the lowest level in a decade as a person familiar with the firm said it was continuing to negotiate with other potential investors after talks with the South Korean firm broke down. Lehman will announce third-quarter earnings and ``key strategic initiatives'' tomorrow, the fourth- largest U.S. securities firm said in a statement. The Standard & Poor's 500 Index dropped 3.4 percent. Stocks also declined in Europe.

``The equity market is thinking if Lehman is not going to get bought, it'll probably go under,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``The sharp fall in equities is weighing on risk appetite, and yen crosses are taking a hit.''

Standard & Poor's may lower its A1 long-term rating on Lehman because the ``precipitous decline'' in the share price creates uncertainty about the firm's ability to raise additional capital. S&P said Lehman's liquidity is ``sound,'' noting the firm can borrow from the Federal Reserve.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net;