Japan's Yen Rises Against Dollar After Biggest Drop Since 1974

By Ye Xie and Lukanyo Mnyanda

Oct. 29 (Bloomberg) -- The yen rose against the dollar as some traders judged its biggest decline since 1974 yesterday was too much to sustain.

Japan's currency also gained versus the Brazilian real, which surged more than 10 percent against the yen yesterday. The dollar fell for a second day versus the euro as a drop in money- market rates reduced demand for the greenback as a haven. The Federal Reserve is forecast by economists to cut the target lending rate by a half-percentage point today.

``The market is looking for a 50-basis-point cut,'' said Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto, a unit of Canada's biggest bank by assets. ``Anything other than that will disappoint the market.''

The yen rose 1 percent to 97.07 per dollar at 9:46 a.m. in New York, from 98.03 yesterday, when it fell 5.4 percent, its biggest decline in more than three decades. The yen traded at 123.67 versus the euro, compared with 124.32, after dropping 6.8 percent yesterday, the most since the 15-nation currency's 1999 debut. The dollar fell 0.8 percent to $1.2783 per euro.

Japan's currency plunged yesterday as a 10.8 percent rally in the Standard & Poor's 500 Index encouraged investors to resume carry trades, in which they get funds in countries with low interest rates and buy higher-yielding assets elsewhere. The yen also fell as speculation increased that the Bank of Japan will cut its target lending rate by a quarter-percentage point.

The yen rose 1.3 percent to 44.78 versus Brazil's real today after dropping 9.3 percent yesterday. Japan's target rate of 0.5 percent compares with Brazil's 13.75 percent.

Slump in Ukraine

Ukraine's hryvnia slumped more than 12 percent to 7.1250 against the dollar after Central Bank Governor Volodymyr Stelmakh said the nation will default on its debt without a $16.5 billion loan from the International Monetary Fund. The nation's parliament has yet to approve the proposed loan.

The pound rose 0.8 percent to $1.6034, bringing its gain in the past two days to 3.3 percent, the most since September 1992, as the U.K.'s main stock index rose more than 4 percent and the central bank said lenders increased mortgage approvals last month for the first time since June 2007.

The Fed will lower its 1.5 percent target lending rate by a half-percentage point at the conclusion of its two-day policy meeting today, according to the median forecast of 70 economists surveyed by Bloomberg News. Policy makers are scheduled to announce the decision at 2:15 p.m. in Washington. Futures on the Chicago Board of Trade show a 46 percent chance the central bank will cut rates by three-quarters of a point.

Fed Rate Cuts

The Fed has cut the benchmark rate from 5.25 percent in the past 13 months and created six lending programs channeling more than $1 trillion into the financial system to limit the severity of a recession.

The dollar touched $1.2330 per euro yesterday, the strongest since April 2006, on concern the seizure of short-term borrowing between banks may further slow global economic growth, encouraging investors to take refuge in the greenback.

In a sign bank lending started to thaw, the London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars dropped 0.05 percentage point to 3.42 percent, its 13th straight drop, according to the British Bankers' Association.

Japan's currency has jumped 32 percent versus the euro and 15 percent against the dollar on speculation the slumping global economy will encourage investors to sell higher-yielding assets and pay back low-cost loans in Japan.

Honda Cuts Forecast

The strength in the yen has eroded Japanese exporters' overseas income. Honda Motor Co., Japan's second-largest automaker, cut its operating profit forecast for the year ended in March 2009 by 13 percent to 550 billion yen ($5.6 billion).

The BOJ is ``leaning toward'' reducing its target rate by a quarter-percentage point to 0.25 percent when it announces a policy decision on Oct. 31, Nikkei reported yesterday without saying where it got the information.

The Group of Seven countries issued an unscheduled statement this week saying it was concerned ``about the recent excessive volatility'' in the yen. Japanese Finance Minister Shoichi Nakagawa said his country is ready to act in currency markets if necessary. Governments intervene in foreign exchange markets by arranging purchases and sales of currencies.

Volatility implied by dollar-yen options expiring in one month, a measure of expectations for future currency moves, was 33.40 percent today. It reached 41.79 percent on Oct. 24, the highest since Bloomberg began compiling data in December 1995.

``What has been driving the yen stronger is not speculative positions but the repatriation of Japanese investors and de- leveraging by global investors,'' said Sophia Drossos, a strategist at Morgan Stanley in New York. ``The trend is not over yet.''

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