Yen Gains as Recession Outlook Spurs Sales of High-Yield Assets

By Stanley White and Ron Harui

Oct. 16 (Bloomberg) -- The yen rose, nearing a three-year high versus the euro, as a stocks rout prompted investors to sell higher-yielding assets including Europe's single currency.

Japan's currency also climbed the most in a week against the Australian dollar as the outlook for slowing global economic growth caused commodities prices to tumble. The dollar rose toward its strongest level in more than a year versus the euro on speculation turmoil in financial markets, sparked by a credit crisis, will encourage investors to buy Treasuries.

``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 rose to 134.08 per euro at 3:20 p.m. in Tokyo from 134.93 late yesterday in New York. It climbed to 132.24 on Oct. 10, the strongest level since June 2005. The dollar advanced to $1.3394 per euro from $1.3499. It reached $1.3259 on Oct. 10, the strongest since March 2007. The dollar was quoted at 100.12 yen from 99.96 yen. The yen may rise to 132 versus the euro today, Iizuka forecast.

Against the Australian dollar, the yen jumped 7.6 percent from late yesterday in Asia to 66.59. Japan's currency also rose 4.3 percent to 60.75 per New Zealand dollar.

Won Drops

The South Korean won fell 9.7 percent to 1,373 per dollar after Standard & Poor's said it may cut the credit ratings of Kookmin Bank and six other Korean financial companies on concern they will have difficulty refinancing maturing debts. That's the biggest drop since South Korea was bailed out by the International Monetary Fund in December 1997.

The yen was bolstered by speculation investors will pare 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 3.75 percent in Europe, 6 percent in Australia, 7.5 percent in New Zealand.

Volatility implied by one-month euro-yen options climbed to 27.47 percent from 26.21 percent yesterday, indicating a larger risk of exchange-rate fluctuations that may erode profits on carry trades. It reached 33.95 percent on Oct. 10, the highest since the European currency's 1999 debut.

More Volatility

``I'd rather stay long on volatility,'' said Shinichi Takasaka, manager of foreign exchange and financial products trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``The focus is on how choppy the spot market could become due to uncertainty about stocks. Money markets may also break down again.''

Traders are ``long on volatility'' when they buy options that profit from price swings.

The Nikkei 225 Stock Average plunged 11 percent today after the Standard & Poor's 500 Index yesterday fell 9 percent, both posting the biggest declines since the 1987 crash. Crude oil slumped to a 13-month low and prices of copper and gold also fell.

The dollar rose against the euro and the yen today on speculation a Treasury Department report will show international investors increased purchases of U.S. assets in August.

``People are buying safe-haven assets such as Treasuries because of fears over the financial-markets turmoil,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``It's positive for the dollar.''

Foreign Buying

Foreign investors increased their purchases of U.S. assets in August to $30 billion in August from $6.1 billion in July, according to a Bloomberg News survey of economists. The Treasury Department will release the data at 9 a.m. in Washington.

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.

Japanese Prime Minister Taro Aso said today the amount pledged by the U.S. is ``insufficient'' to revive investors' confidence in the financial system. 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.''

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