Yen Rises Above 95 Per Dollar, 13-Year High; Carry Trades Cut

By Stanley White and Ron Harui

Oct. 24 (Bloomberg) -- The yen climbed to a 13-year high against the dollar as the risk of a global recession prompted investors to slash carry trades, in which they fund purchases of higher-yielding assets with Japanese currency.

The yen also surged to the strongest in six years versus the euro after Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the International Monetary Fund. The common European currency fell to a two-year low versus the dollar after Standard & Poor's Ratings Services threatened yesterday to cut Russia's debt ratings, adding to signs the credit crisis is spreading.

``I can't rule out the scenario where the yen rises even faster than I had anticipated,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third- biggest lender. ``Speculators are unwinding carry trades. This risk aversion is coming from the credit crunch and the chance of a global recession.''

The yen rose to 94.77 per dollar, the highest level since Aug. 15, 1995, and traded at 94.84 at 7:40 a.m. in London from 97.31 late yesterday in New York. Against the euro, it climbed to 120.75, the strongest level since November 2002, before trading at 120.93 from 125.89. The euro bought $1.275 from $1.2934 yesterday, when it reached $1.2728, the lowest level since November 2006.

The yen touched a post-World War II high of 79.75 against the dollar on April 19, 1995, prompting the Group of Seven nations to intervene that year by buying the greenback to stabilize currency markets. The G-7 is comprised of Canada, France, Germany, Italy, Japan, the U.K. and the U.S. The yen may rise to 90 per dollar by the end of March, Umemoto said.

Carry Trades

The yen rose 7 percent this week against the dollar, the biggest gain since October 1998. It surged 13 percent against the euro, the biggest weekly advance since the 15-nation currency's 1999 debut. The euro headed for a 4.9 percent decline versus the dollar.

The Australian dollar fell 6 percent to 61.22 yen from late yesterday in New York. New Zealand's dollar declined by 4.7 percent to 55.21 yen. The two currencies are favorites for carry trades, where investors borrow in countries with low interest rates and invest in nations with higher rates. The risk is that financial-market moves erase those profits. Japan's target rate of 0.5 percent compares with 6 percent in Australia and 6.5 percent in New Zealand.

Volatility on one-month dollar-yen options, a measure of expectations for future price swings, rose to 28.14 percent, the highest since Oct. 13, indicating greater risk market moves may erode carry trade profits. It reached 32.175 percent on Oct. 10, the highest since Bloomberg began collecting data in December 1995.

Financial Turmoil

South Korea halted Kosdaq stock trading after the index slumped more than 11 percent following data showing the slowest economic growth in four years. A rout in global stocks has wiped out more than $10 trillion of market value this month.

Coordinated rate cuts by major central banks on Oct. 8 and financial system bailouts in the U.S. and Europe have failed to revive stock markets or encourage banks to resume lending. Australian three-month interbank borrowing costs rose 3 basis points to 5.89 percent, the highest since Oct. 15.

The pound fell to $1.5949 from $1.6230 for a 7.7 percent drop this week on speculation the Bank of England will lower interest rates to help avert a prolonged recession. Sterling earlier touched $1.5938, the weakest since September 2003. It slid as much as 3.4 percent on Oct. 22, the biggest intraday loss since September 1992, when investor George Soros helped drive the currency out of Europe's system of linked exchange rates.

U.K. Economy

U.K. gross domestic product rose 0.5 percent from a year earlier in the third quarter, slowing from a 1.5 percent pace of growth in the previous three months, according to a Bloomberg survey of economists. The Office for National Statistics will release the data at 9:30 a.m. today in London

The spread, or difference in yield, between two- and 10-year gilts was at 122 basis points, near the widest since October 1996, a sign traders expect the BOE to lower its 4.5 percent benchmark rates by year-end.

The euro and the pound may weaken as European and U.K. banks have five times as much loan exposure to emerging markets as the U.S. or Japan, with most lending to Eastern Europe, according to Morgan Stanley.

``Part of the reason why euro-dollar continues to drift lower has to do with the rising risk that pressures in Eastern Europe will have a negative boomerang effect on Euroland,'' London-based currency strategists Stephen Jen and Spyros Andreopoulos wrote in a research note yesterday.

Emerging Markets

European banks' lending to emerging markets is about 21 percent of Europe's GDP and U.K. banks' loans are around 24 percent of national output, compared with 4 percent for the U.S. and 5 percent for Japan, the strategists wrote, citing data from the Bank for International Settlements.

``There are concerns over country risk in Europe,'' said Toshihiko Sakai, head of trading for foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's biggest bank. ``Some currencies there appear to be under speculative attack because their banking sectors aren't sufficiently guaranteed by the governments.'' The euro may weaken to parity with the dollar by year-end, he said.

The Hungarian forint weakened by 2.5 percent to 221.79 per dollar, near a two-year low of 223.63. The Polish zloty fell 1.3 percent to 3.0415 per dollar, the weakest since January 2007.

Australia's dollar ``targets'' the 2000 low of 55.52 yen, based on charts that predict price movements, said Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London.

Daily momentum indicators such as the stochastic oscillator chart have ``turned lower again,'' Edgeley wrote in a research note yesterday. ``The Aussie-yen has scope to the 2000 lows at 55.52,'' he said, referring to the currency by its nickname.

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