Yen Falls Most in Two Weeks on Stock Gains, Intervention Talk

By Ron Harui and Candice Zachariahs
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Oct. 28 (Bloomberg) -- The yen fell the most in two weeks against the euro and dropped for the first time in six days versus the dollar as a rebound in Asian stocks bolstered investor confidence in higher-yielding assets.

The yen also declined on speculation Japan's central bank will sell the currency for the first time since March 2004 to help exporters. Japanese Finance Minister Shoichi Nakagawa said yesterday the government is ready to act if needed to halt gains in the yen, which earlier traded near a 13-year high against the dollar and its strongest since May 2002 versus the euro.

``Equities are rebounding, giving some assurance to investors,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``There also are fears of possible intervention by Japan. All of this is causing selling of the yen.''

Japan's currency slid 1.6 percent, the most since Oct. 13, to 117.83 per euro at 8 a.m. in London from 115.92 late yesterday in New York, when it touched 113.64, the strongest level in more than six years. The yen fell to 94.53 per dollar, from 92.78. It reached 90.93 on Oct. 24, the highest since August 1995. The euro was at $1.2485 from $1.2493. It earlier declined as low as $1.2330, the weakest since April 2006.

The British pound was little changed at $1.5540. It touched $1.5269 on Oct. 24, the lowest since August 2002. The Australian dollar climbed 2.7 percent to 61.76 U.S. cents from 60.13 cents in New York yesterday.

Possible Intervention

Japan's Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo today that abrupt increases in currency volatility are undesirable. The yen has appreciated this month against all of some 170 global currencies tracked by Bloomberg, eroding Japanese exporters' overseas income.

Honda Motor Co., Japan's second-largest automaker, today cut its operating profit forecast for the financial year ending March by 13 percent to 550 billion yen ($5.8 billion). The new estimate was based on an exchange rate of 100 per dollar and every 1 yen gain against the greenback reduces annual operating profit by 20 billion yen.

``There's a little bit of concern over intervention,'' said Sharada Selvanathan, a currency strategist at BNP Paribas SA in Hong Kong. ``The market doesn't want to be too long yen for now because the Japanese have clearly suggested that if the yen strengthens they might consider coming into the market.''

Stocks Rebound

Japan's currency has jumped 28 percent versus the euro and 45 percent against the Australian dollar this month on speculation investors will unwind carry trades, in which they get loans in countries with low borrowing costs and seek higher returns elsewhere.

Japan's benchmark interest rate of 0.5 percent compares with 3.75 percent in Europe and 6 percent in Australia.

The allure of carry trades dimmed in recent weeks as a global credit crisis led to increased currency volatility and fanned a stocks rout that's erased more than $12 trillion of market value this month alone. Japan's Nikkei 225 Stock Average rebounded from the lowest level in 26 years today and Hong Kong's Hang Seng Index surged 13 percent, snapping a five-day losing streak that drove the benchmark down 28 percent.

Gains in the common European currency may be limited after European Central Bank President Jean-Claude Trichet said yesterday he may cut interest rates next week. Europe's economy is on the brink of a recession, with the region's manufacturing and service industries contracting at a record pace in October and German business confidence dropping to a five-year low.

European Rate Cuts

``Worries over Europe's economy are heightening and Trichet has signaled lower rates,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. ``The bias for the euro is down.'' The euro may weaken to $1.22 this week, he forecast.

Investors are betting the ECB will lower borrowing costs further by June after cutting the main refinancing rate by a half point to 3.75 percent on Oct. 8. The implied yield on the three-month Euribor contract expiring in June fell to 3.020 percent today from 3.225 percent a week earlier.

The Euribor contract has averaged around 44 basis points, or 0.44 percentage point, higher than the ECB's overnight target during the past two years, Bloomberg data show.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net