Yen Gains Most in Decade as Investors Abandon Risk, Carry Trade

By Daniel Kruger

Oct. 11 (Bloomberg) -- The yen rallied the most against the dollar since 1998 as a plunge in stocks around the world encouraged investors to sell higher-yielding assets and pay back low-cost loans in Japan.

Japan's yen gained versus all of the other major currencies this week as investors and economists urged Group of Seven financial officials meeting in Washington to step up efforts to prevent the global credit market crisis from choking off lending to companies and households.

``I don't think it gets more dramatic than this,'' said JensNordvig, a currency strategist at Goldman Sachs Group Inc. in New York. ``The moves we're seeing are among the most extreme this century. It's affecting all markets at the same time.''

The yen gained 5 percent to 100.08 per dollar from 105.32 on Oct. 3 after reaching 97.92, the strongest since March 19. Japan's currency advanced 6.9 percent to 135.08 per euro from 145.11 and touched 132.24, the strongest since June 2005. The euro fell 2.6 percent to $1.3418 from $1.3772 and touched $1.3259, the weakest level since March 2007.

The drop in the U.S. currency against the yen was the biggest since the period ended Oct. 9, 1998, when the greenback plunged 14 percent as investors shed risk in the wake of the collapse of hedge fund Long-Term Capital Management LP.

Coordinated interest-rate reductions by central banks in the U.S., Europe and Asia this week failed to revive lending among banks. The cost of borrowing in dollars in London for three months rose to 4.82 percent yesterday, the highest since December, the British Bankers' Association said.

Canada's Dollar

Canada's dollar suffered the biggest weekly decline since January 1971, when Bloomberg records begin, falling 10 percent against the greenback as the deepening credit crisis drove investors to take refuge in the U.S. dollar.

``This is still part of the bigger picture of demand for U.S. dollars,'' said Jonathan Gencher, director of foreign- exchange sales at Bank of Montreal in Toronto.

Brazil's central bank sold dollars in the local spot market for a third day yesterday to curb an 18 percent drop in the real against the dollar in October. The real fell 13.3 percent this week to 2.3175 per dollar after touching 2.55 on Oct. 8, the weakest since April 2005.


Mexico's peso touched 14.2927 versus the dollar, the weakest since 1993, when a new peso equivalent to 1,000 old pesos was introduced. The peso ended the week down 16 percent to 13.0500 after the central bank sold a record $6.4 billion to prop up the local currency.

`All Necessary Steps'

Threatened by the worst economic outlook in a quarter- century, finance ministers and central bankers from the G-7 nations said late yesterday they're prepared to take ``all necessary steps'' to unfreeze credit markets and prevent financial companies from failing.

``We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth,'' G-7 policy makers said in a joint statement after talks in Washington. ``The current situation calls for urgent and exceptional action.''

Officials pledged to ensure that major banks have access to cash and can tap public funds for capital to reestablish confidence and keep them lending. They stopped short of embracing specific policies such as a U.K-style commitment to guarantee lending between banks.

Euro vs. Dollar

Europe's currency posted its second straight weekly decline versus the dollar on speculation the credit crisis in Europe will deepen, prompting the European Central Bank to cut interest rates further. The bank lowered its main refinancing rate this week for the first time in five years. The pound fell 3.7 percent to $1.7065 this week, falling below $1.70 yesterday for the first time since November 2003.

Investors should buy the dollar while selling the euro and the pound because interest rates in Europe and the U.K. will fall faster than in the U.S., according to Royal Bank of Scotland Group Plc. The dollar could reach $1.25 per euro and $1.58 per pound by the end of next year, the firm forecast in a note to clients.

The South Korean won rebounded from a decade-low yesterday, paring its loss for the week to 5.4 percent to 1,307.60 per dollar, after a meeting among financial regulators fueled speculation the government will intervene to support the currency. The decline was the biggest in Asia.

The yen gained 20.2 percent this week to 65.06 versus the Australian dollar, 15 percent to 59.22 against New Zealand's currency, known as the kiwi, and 7.9 percent against the euro on speculation investors will reverse trades in which they get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 6 percent in Australia, 7.5 percent in New Zealand and 3.75 percent in Europe.

The Standard & Poor's 500 Index and the Dow Jones Industrial Average dropped 18 percent this week. Japan's Nikkei 225 Stock Average and Europe's Dow Jones Stoxx 600 Index had their worst weeks on record.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net