Yen Rises as Carry Trade Evaporates on Tumbling Global Stocks

By Ye Xie and Lukanyo Mnyanda

Oct. 27 (Bloomberg) -- The yen rose to the strongest level versus the euro since May 2002 and traded near a 13-year high against the dollar as tumbling stocks encouraged investors to sell higher-yielding assets funded by low-cost loans in Japan.

French Finance Minister Christine Lagarde said in an interview with Bloomberg News that the Group of Seven doesn't plan to intervene to weaken the yen after the G-7 said in an unscheduled statement that excessive movements in the currency may threaten financial stability. The pound slid after an industry report showed U.K. house prices slumped.

``It's a combination of unwinding carry positions and money going home to Japan and the U.S.,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``It's not an environment where one should be looking for return on capital, but for return of capital.''

The yen gained 2.2 percent to 116.33 per euro at 10:31 a.m. in New York, from 118.96 on Oct. 24, and reached 113.64, the strongest since May 2002. The yen climbed 0.9 percent to 93.50 per dollar from 94.32 at the end of last week, when it touched 90.93, the strongest since 1995. The euro fell as much as 2.3 percent to $1.2334, the weakest in 2 1/2 years, from $1.2623.

In the past month, Japan's currency has increased 14 percent against the dollar, 34 percent versus the euro, 55 percent versus the Australian dollar and 44 percent against the New Zealand dollar on speculation investors will unwind carry trades, in which they get loans in countries with low borrowing costs and seek higher returns elsewhere.

Stronger Yen

The yen gained 3.1 percent to 56.92 against the Aussie and 3.9 percent to 50.44 versus the New Zealand dollar today. The Bank of Japan's 0.5 percent target lending rate compares with 3.75 percent in Europe, 6 percent in Australia and 6.5 percent in New Zealand.

The Standard & Poor's 500 Index dropped 1.3 percent and stocks in Asia and Europe tumbled as investors bet the credit crisis and mounting bank losses will push the global economy into a recession. Hong Kong's Hang Seng Index sank as much as 15 percent, and trading was halted in the Philippines and Thailand.

The G-7 made its statement after a request from Japan, said Finance Minister Shoichi Nakagawa in Tokyo, adding that his government was ready to act if needed.

``We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability,'' the G-7 said in its statement, read by Japan's Nakagawa. The group comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S. Japan last sold its own currency in March 2004.

Lagarde on Yen

Asked by Bloomberg News in an interview in Montpellier, France, if the G-7 will intervene to sell Japan's currency, French Finance Minister Lagarde said no.

The possibility of intervention is ``still low,'' because the ``sharp appreciation'' of the yen is not caused by ``speculation,'' wrote Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co., in a research note today.

``The financial system and economic problems in U.S. and Europe are probably in more severe conditions than in Japan,'' Sasaki wrote. ``Therefore, it is difficult for Japan to sell the yen only out of self-interest.''

Australia's central bank bought its currency for a second day. Central banks intervene in foreign-exchange markets when they arrange purchases and sales of currencies. The Aussie dropped 2.7 percent to 60.58 U.S. cents.

Volatility on major currencies touched 26.55 on Oct. 24, according to a JPMorgan Chase & Co. index, the highest level since its inception in 1992.

Weaker Pound

The pound fell 3.2 percent versus the dollar to $1.5384, near the lowest in five years, as London-based Hometrack Ltd. said the average cost of a residential property in England and Wales slipped 7.3 percent from a year earlier. Sterling decreased 1.7 percent against the euro to 80.67 pence.

The euro stayed lower against the dollar and the yen after a survey by the Ifo institute showed business confidence in Germany, the largest of the 15 economies sharing the currency, declined to the lowest level in more than five years in October. European Central Bank President Jean-Claude Trichet said policy makers may cut interest rates at their Nov. 6 meeting.

The dollar is reasserting its status as the world's reserve currency as investors seek a haven from plunging emerging-market stocks and bonds. The ICE futures exchange's U.S. Dollar Index, which tracks the greenback against the currencies of six major trading partners, soared to the highest in more than two years. The sell-off in emerging markets may ``set the stage'' for bigger gains, according to Barclays Capital.

Sales of new houses in the U.S. unexpectedly rose in September from a 17-year low, propelled by a drop in prices before the latest turmoil in financial markets. Purchases increased 2.7 percent to an annual rate of 464,000 from 452,000 the prior month that was less than previously estimated, the Commerce Department said today in Washington.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net