Yen Rises Against Higher-Yielding Currencies on Rate Outlook

By Stanley White and Ron Harui

Oct. 21 (Bloomberg) -- The yen rose against higher-yielding currencies including the euro and the Australian dollar on speculation global central banks will lower interest rates, reducing the appeal of so-called carry trades.

Japan's currency gained the most against the Australian dollar after the Reserve Bank of Australia said it saw a ``strong economic case'' for its Oct. 7 interest-rate reduction, fueling speculation it may cut borrowing costs further. The U.S. dollar rose to an 18-month high against the euro after Federal Reserve Chairman Ben S. Bernanke called for government stimulus measures to avert a prolonged recession.

``The RBA minutes are a reason to push the yen higher against the euro and other currencies,'' said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., a unit of the U.K.'s third-biggest bank. ``It's damaging for sentiment toward higher-yielding currencies.''

The yen advanced to 134.96 per euro at 7:45 a.m. in London from 135.92 late yesterday in New York, on course for a third day of gains. The dollar climbed to $1.3273 per euro from $1.3344 late yesterday in New York. It earlier reached $1.3258, the strongest since March 2007. The yen strengthened to 101.52 per dollar from 101.86.

Against the Australian dollar, the yen rose to 69.37 from 71.76 late yesterday in New York. It also advanced to 62.08 per New Zealand dollar from 63.47.

Inflation will slow at a faster rate than previously expected amid a global economic slowdown, members of the Reserve Bank of Australia said according to minutes of their Oct. 7 meeting released today in Sydney.

RBA Outlook

Forces are building that will ``start to dampen pressure on prices,'' Reserve Bank Governor Glenn Stevens said in a speech after the minutes were published. This month's reduction in the overnight cash rate by 1 percentage point to 6 percent was twice as much as economists forecast.

``The headlines are sufficiently gloomy for nervous markets to knock the Aussie lower,'' said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, referring to the currency by its nickname. ``The minutes reflect the extremely worrying conditions at the time and obviously there's only been a degree of improvement.''

Citic Pacific Ltd., the Hong Kong arm of China's biggest state-owned investment company, said yesterday it may lose as much as HK$15.5 billion ($2 billion) on unauthorized currency contracts that went sour as the Australian dollar declined. The currency plunged 28 percent since June 30 against the dollar, the most among the 16 most-active currencies.

The euro declined to its lowest against the dollar since March 2007 after ECB Executive Board member Juergen Stark said in an interview with Deutschlandfunk that he sees risks for one or two more ``accidents'' in the financial markets.

In carry trades, investors borrow in currencies with low interest rates and invest in nations with higher rates. Japan's target rate of 0.5 percent is the lowest among major economies.

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