Yen, Dollar Rise as Recession Woes Hit High-Yielding Currencies

By Stanley White

Oct. 31 (Bloomberg) -- The yen and the dollar rose, heading for record monthly gains against the euro, as signs of a global recession prompted investors to sell higher-yielding currencies.

Japan's currency advanced against the Australian and New Zealand dollars as commodities including gold and copper fell. The yen also gained after the Bank of Japan cut interest rates less than expected. The euro, which was introduced in 1999, declined on speculation European central banks will lower rates.

``Investors had positions using the dollar or yen to invest in the euro or emerging-market currencies,'' said Masataka Horii, one of four investors for the $47.9 billion Kokusai Global Sovereign Open fund in Tokyo, the biggest bond fund in Asia. ``Now people are rushing to close that position.''

The yen climbed to 122.77 per euro as of 7:19 a.m. in London from 127.31 late yesterday in New York. Against the dollar, it was at 96.78 from 98.61. The euro fell to $1.2696 from $1.2915. The pound weakened to $1.6175 from $1.6451. The Australian dollar slumped to 65.97 U.S. cents from 68.23.

Against the Australian dollar, the yen gained to 63.84 from 67.24. Japan's currency also rose to 56.18 versus the New Zealand dollar from 58.33.

The South Korean won slid 3.1 percent to 1,290.95 per dollar after official reports showed manufacturers' confidence tumbled to a record low and factory output fell for a third month. The Kospi index of the nation's shares plunged 23 percent this month, the most since October 1997.

Global Slump

U.K. consumer confidence in October fell toward the lowest since at least 1974, London-based researcher GfK NOP Ltd. said today. The U.S. economy shrank in the third quarter by the most since 2001, data showed yesterday.

The Japanese currency is popular in carry trades, where purchases of higher-yielding assets are funded in nations with lower rates. Japan's key rate of 0.5 percent compares with 6 percent in Australia and 6.5 percent in New Zealand.

The single European currency has dropped 18 percent versus the yen in October and 10 percent against the dollar. The greenback is down 9 percent against the yen, the biggest decline since 1998, when hedge fund Long-Term Capital Management LP collapsed.

The yen remained higher after the BOJ lowered its benchmark rate to 0.3 percent from 0.5 percent, compared with forecasts for a cut to 0.25 percent. Governor Masaaki Shirakawa told a press briefing that the Japanese economy had clearly worsened this month and that three dissenters had wanted a quarter-point cut. One favored no reduction and four voted for the move.

Month-End Squaring

Volatility implied by dollar-yen options expiring in one month, a measure of expectations for future currency moves, fell to 30.27 percent today from 35.38 percent at the end of last week. It reached 41.79 percent on Oct. 24, the highest since Bloomberg began compiling data in December 1995.

The dollar gained versus the euro on speculation overseas investors in U.S. stocks cut bets against the greenback at the end of the month to keep their currency hedge ratios constant, according to Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. The Standard & Poor's 500 Index is down more than 18 percent in October.

``Foreign investors buying U.S. equities sell the dollar as a hedge,'' said Osborne. ``Because the value of the stocks has declined so much, they have to buy back the dollar to maintain their hedge ratios.''

Rate Cuts

The Federal Reserve reduced the target lending rate by a half-percentage point to 1 percent on Oct. 29, the lowest since June 2004 and matching the level during the Eisenhower administration in the late 1950s. Central banks in China, Taiwan, Hong Kong and the Middle East also lowered borrowing costs this week as policy makers race to avert a global recession.

The European Central Bank participated in a coordinated interest-rate reduction by global central banks on Oct. 8 to prevent the collapse of the global financial system, reducing its benchmark rate by half a point to 3.75 percent.

Policy makers meet Nov. 6, when they will probably cut the region's main refinancing rate by half a percentage point to 3.25 percent, according to a Bloomberg survey of 26 economists.

The British pound declined 8.4 percent this month, headed for its biggest drop since October 1992, on speculation the Bank of England will lower interest rates as the economy slows.

The U.K. will be trapped in a recession throughout next year and deflation may take hold if interest rates don't drop soon and ``significantly,'' BOE policy maker David Blanchflower said on Oct. 29.

The British central bank will lower benchmark rates by a half-point to 4 percent when it announces its next decision on Nov. 6, according to a Bloomberg survey of 30 economists.

``We remain concerned about British pound given the deteriorating economic outlook in the U.K., and recent signals from the BoE suggest scope for more aggressive easing than previously,'' wrote New York-based Sophia Drossos, a strategist at Morgan Stanley in a research note yesterday.

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