Yen Posts Biggest Advance in Decade as Carry Trade Evaporates

By Daniel Kruger and Kim-Mai Cutler

Oct. 10 (Bloomberg) -- The yen rose against the euro and posted its biggest weekly gain in a decade against the dollar as a global stock rout prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan.

Japan's currency rallied the most versus the 15-nation euro in any week since its debut in 1999 as an 18 percent drop in the Standard & Poor's 500 Index discouraged carry trades. President George W. Bush said the U.S. is working with global partners to solve the financial crisis as Group of Seven finance ministers and central bankers met in Washington.

``Investors are concerned it could get worse,'' said JensNordvig, a currency strategist at Goldman Sachs Group Inc. in New York. ``Clearly a lot of investors have only one goal, to preserve capital.''

The yen advanced 0.8 percent to 134.79 per euro at 4:21 p.m. in New York, from 135.83 yesterday, increasing 7.1 percent this week and touching 132.24, the strongest level since June 2005. The yen dropped 0.8 percent to 100.58 per dollar from 99.82 after reaching 97.92, the strongest since March 19. The euro fell 1.6 percent to $1.3392 from $1.3604 and was down 2.8 percent for the week.

The U.S. currency decreased 4.4 percent against the yen this week, the most since the period ended Oct. 9, 1998, when the greenback plunged 14 percent as investors shed risk in the wake of the collapse of Long-Term Capital Management LP.

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

Peso Gains

Mexico's peso increased 1.4 percent to 13.0326 versus the dollar to stem seven straight days of losses after the central bank sold a record $6.4 billion in the currency market, stepping up its bid to quell a rout in the peso that threatens to bankrupt companies and ignite inflation in Latin America's second-biggest economy.

Threatened by the worst economic outlook in a quarter- century, G-7 officials arrived in Washington without a broad- based strategy that investors were seeking. Among options is a proposal by U.K. Chancellor Alistair Darling for nations to guarantee lending between banks, a suggestion U.S. Treasury Secretary Henry Paulson hasn't ruled out.

``I don't think this particular G-7 meeting will rewrite history,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``I'm not optimistic anything material will come out.''

G-7 Meetings

Paulson and Federal Reserve Chairman Ben S. Bernanke met today with counterparts of the G-7, which comprises Canada, France, Germany, Italy, the U.K., the U.S. and Japan. Paulson and aides are still considering ways to proceed with a $700 billion bank bailout, including having the government acquire preferred stock, two officials informed of the matter said.

Europe's currency was on course for 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 two days ago for the first time in five years. The pound fell as much as 1.8 percent to $1.6792, breaching $1.70 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 today.

`Printing Press'

One risk to that forecast is ``if there's anything akin to using the printing press'' that expands the U.S. money supply, which could lead the currency to depreciate, said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut.

The Fed has expanded its balance sheet 6.3 percent for the week ended Oct. 8 to $1.59 trillion, and 76 percent since Sept. 5 from $905.7 billion, boosting its ability to act as lender of last resort when banks can't find funding elsewhere.

While the central bank was able to remove a 15 percent increase in its balance sheet quickly after the Sept. 11, 2001, terror attacks and a 7 percent increase following the collapse of Long-Term Capital Management, this expansion has more potential to remain ``because the problems are so systemic,'' Ruskin said.

The South Korean won surged as much as 11.3 percent to 1,224.95 per dollar after a meeting among financial regulators fueled speculation the government will intervene to support the currency, which reached a decade-low of 1,485.32 yesterday.

The yen gained 20.2 percent this week to 65.01 versus the Australian dollar and 13.7 percent to 60.15 against New Zealand's currency, known as the kiwi, 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 and 7.5 percent in New Zealand.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net