Yen Near 3-Year High as Stock Slump Spurs Carry Trade Reversal

By Stanley White and Ron Harui

Oct. 8 (Bloomberg) -- The yen traded near a three-year high against the euro on speculation a slide in Asian stocks will prompt investors to reduce holdings of higher-yielding assets financed in Japan, known as carry trades.

The currency was also close to a six-month high against the dollar on concern global economic growth will slow as the credit crisis spreads. The British pound was near the lowest in almost seven years versus the yen after the National Institute for Economic and Social Research said today the U.K economy shrank in the third quarter.

``Lingering fears about the health of financial sectors in the U.S. and Europe and concerns over a global recession should continue to underpin the yen,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. ``We're far from out of the woods and any restoration of investor confidence will take time.''

Japan's currency traded at 137.93 per euro at 9:32 a.m. in Tokyo from 137.89 late in New York yesterday. It reached 135.05 on Oct. 6, the strongest since September 2005. The yen was at 177.38 per pound from 177.13. It touched 174.10 on Oct. 6, the highest since November 2001. The currency was quoted at 101.53 against the dollar from 101.47.

The Nikkei 225 Stock Average declined 3.5 percent. The Standard & Poor's 500 Index fell 5.7 percent yesterday, breaking below 1,000 for the first time since 2003.

The U.K.'s gross domestic product shrank 0.2 percent in the three months through September, the London-based institute said. The International Monetary Fund expects the economy to contract next year, according to a draft of its revised forecasts obtained by Bloomberg News.

To contact the reporters on this story: Stanley White in Tokyo at Swhite28@bloomberg.net; Ron Harui in Singapore at Rharui@bloomberg.net