Yen Extends Gains on Speculation U.S. Will Enter a Recession

By Stanley White and Ye Xie

Oct. 16 (Bloomberg) -- The yen rose toward a seven-month high versus the dollar after the biggest decline in U.S. retail sales in three years added to concern the credit-market crisis will push the world's largest economy into a recession.

Japan's currency also approached the strongest level in three years versus the euro and gained the most in a week against the Australian dollar as global stocks plunged, encouraging investors to sell higher-yielding assets and pay back low-cost loans in Japan.

``We're not in an environment where you can take on risk, and that supports a stronger yen,'' said Osao Iizuka, head of foreign-exchange trading in Tokyo at Sumitomo Trust & Banking Co., Japan's seventh-largest publicly listed lender. ``Stock markets keep on falling because there's good reason to expect economic growth to deteriorate.''

The yen traded at 99.58 per dollar as of 8:32 a.m. in Tokyo, from 99.96 late yesterday in New York. It reached 97.92 on Oct. 10, the highest level since March 19. The yen was at 133.99 per euro from 134.93 yesterday. It climbed to 132.24 on Oct. 10, the strongest since June 2005. The dollar traded at $1.3458 per euro, from $1.3499. The yen may rise to 99 per dollar and 132 versus the euro today, Iizuka forecast.

Against the Australian dollar, the yen jumped 8.8 percent from late yesterday in Asia to 65.38, its biggest gain since Oct. 8. Japan's currency also surged 6 percent to 59.55 per New Zealand dollar and rose 1.3 percent versus the South African rand to 9.3000 from late yesterday in New York.

Carry Trades

Japan's currency gained on speculation investors will abandon carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark rate compares with 1.5 percent in the U.S., 3.75 percent in Europe, 6 percent in Australia, 7.5 percent in New Zealand and 12 percent in South Africa.

Nikkei 225 Stock Average futures in Chicago tumbled 11 percent from the Osaka close and U.S. stocks plunged the most since the crash of 1987 after U.S. retail sales decreased 1.2 percent in September, the most since August 2005, following a 0.4 percent drop the previous month, the Commerce Department reported yesterday. The economy deteriorated throughout the U.S. last month, the Federal Reserve said yesterday in its regional economic survey, known as the Beige Book because of the color of its cover.

``Yen buying is still the mainstream trade because of risk aversion,'' said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. ``We are in a recession.''

Fed Chairman Ben S. Bernanke said in a speech in New York yesterday that government efforts to calm financial markets and stem the credit market crisis probably won't lead to an economic rebound ``right away.''

Confidence Index

Expectations for currency appreciation were the highest for the yen, the Swiss franc and the dollar, according to the Bloomberg Professional Global Confidence Index, based on a survey of 3,764 Bloomberg users last week. The index for the yen rose to 71.89 from 64.75. For the franc, it increased to 65.04 from 44.51. The index for the dollar was 61.28, down from 68.86.

Money-market rates fell for a third day yesterday, fueling speculation that global bailouts are starting to thaw credit markets. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans dropped 9 basis points, or 0.09 percentage point, to 4.55 percent, the British Bankers' Association said.

The dollar rose to the highest level versus the euro since March 2007 on Oct. 10, partly as banks' reluctance to lend to each other spurred a surge in demand for U.S. currency funding in global money markets. The U.S. Treasury announced on Oct. 14 a plan to inject $250 billion into financial institutions, a day after European governments committed $1.8 trillion to guarantee loans and invest in lenders.

`Slow Improvement'

``There will be slow improvement in wholesale funding,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``Over time, the dollar funding issue will sort itself out, which will lead to some retracement of the recent dollar gains.''

The yen has climbed 12 percent versus the euro and 38 percent versus the rand this month on concern credit market losses will lead to a global recession. The speed of the yen's appreciation will slow as ``a lot of speculative positions'' are washed out, said Sinche.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net.