Yen Falls Most Since 2001 Against Euro as Global Stocks Rebound

By Ye Xie and Lukanyo Mnyanda

Oct. 28 (Bloomberg) -- The yen fell the most against the euro since January 2001 and dropped versus the dollar as a rebound in global stocks encouraged investors to reduce bets against higher-yielding currencies.

The currency declined versus the Australian and New Zealand dollars on speculation carry trades will get a boost and Japan's central bank will sell the yen for the first time in four years to help exporters. South Africa's rand, Mexico's peso and Brazil's real advanced versus the dollar on reduced aversion to higher-yielding, emerging-market assets.

``When stocks rise, investors have to cover their short yen-cross positions,'' said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. ``The foreign-exchange market still has a high correlation with stock markets.'' A short is a bet an asset will decline.

The yen slid 3.1 percent to 119.54 per euro at 9:36 a.m. in New York, from 115.92 yesterday, when it touched 113.64, the strongest level in more than six years. The yen fell 2.7 percent to 95.27 per dollar from 92.78. It reached 90.93 on Oct. 24, the strongest since August 1995. The euro rose 0.4 percent to $1.2543 after dropping to $1.2330, the weakest since April 2006.

Japan's currency dropped 6.8 percent to 59.87 against the Aussie and 5.4 percent to 52.95 versus the New Zealand dollar on speculation investors will revive 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 target lending rate compares with 3.75 percent in Europe, 6 percent in Australia and 6.5 percent in New Zealand.

Stock Gains

The Standard & Poor's 500 Index climbed 2.8 percent after Japan's Nikkei 225 Stock Average rebounded from the lowest level in 26 years.

The yen has jumped 25 percent versus the euro and 42 percent against the Australian dollar this month as the global credit crisis and a stock rout erased more than $12 trillion in equity value.

Japan's Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo today that abrupt increases in currency volatility are ``undesirable.'' Finance Minister Shoichi Nakagawa said yesterday the government is ready to act if needed.

A surge in the yen is eroding Japanese exporters' overseas income. Honda Motor Co., Japan's second-largest automaker, cut its operating profit forecast today for the year ended in March by 13 percent to 550 billion yen ($5.8 billion). The new estimate was based on an exchange rate of 100 per dollar. Every gain of 1 yen against the greenback reduces annual operating profit by 20 billion yen.

`Bad' Bet

``At this point, it would be bad to bet against intervention'' by the Bank of Japan, said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, in an interview on Bloomberg Television. ``Currencies are being driven by risk appetite and anxiety in the market.''

The Aussie rose 4.6 percent to 62.88 U.S. cents after touching 60.09 cents yesterday, the weakest level since April 2003. The Reserve Bank of Australia bought its currency for a third day to stem losses.

The real rose 2.9 percent to 2.1863 against the dollar, the peso advanced 2.6 percent to 13.1763 and the rand increased 4.5 percent to 10.5160 on demand for assets in emerging markets.

The euro may weaken to $1.22 this week as the ``worries over Europe's economy are heightening,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo.

ECB Outlook

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

Investors are betting the ECB will lower borrowing costs further by June after reducing the main refinancing rate by a half-percentage point to 3.75 percent on Oct. 8. The implied yield on the three-month Euribor contract expiring in June was 3.1 percent today, compared with 3.23 percent a week ago. The contract has averaged 44 basis points, or 0.44 percentage point, more than the ECB's overnight target during the past two years, Bloomberg data show.

The Federal Reserve will lower its 1.5 percent target lending rate by a half-percentage point at the conclusion of its two-day policy meeting tomorrow, according to the median forecast of 65 economists surveyed by Bloomberg News.

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