Dollar to Drop 8% Against Yen as Carries Unwind, Barclays Says

By Candice Zachariahs

Oct. 23 (Bloomberg) -- The yen may strengthen 8 percent by March 2009 to 90 per U.S. dollar as investors dump higher- yielding assets funded in Japan and bring their cash home, Barclays Capital said.

Japan's yen appreciated 8 percent against the dollar in the past year, the only gainer among the 16 most actively traded currencies versus the greenback. The currency traded at 97.77 per U.S. dollar at 10:45 a.m. in Tokyo from 97.66 yesterday.

``The main story is that risk aversion will encourage unwinding of yen carry trades,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender. `` This is coming from the risk of a global recession.''

The yen will trade between 95 and 100 till the end of the year and rise to 90 by March 2009, Barclays said today in a research note.

Investors in so-called carry trades borrow in countries such as Japan, where interest rates are at 0.5 percent, and invest in nations such as Australia, where borrowing costs are 6 percent. The risk is exchange-rate fluctuations can erase profits.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net