Yen Rises as Stock Market Declines Reduce Carry Trade Demand

By Stanley White

Oct. 31 (Bloomberg) -- The yen rose for the first day in four against the euro as declines in Asian stocks prompted investors to sell higher-yielding assets funded by low-cost loans in Japan.

Japan's currency also gained against the Australian and New Zealand dollars as commodities fell amid concern a credit crisis has thrown the global economy into a recession. The dollar advanced against the euro and the British pound as this month's decline in U.S. stocks allowed fund managers to reduce bets against the currency designed to hedge their holdings.

``Stocks are taking a hit and that's working against the yen,'' said Katsunori Kitakura, chief treasury dealer in Tokyo at Chuo Mitsui Trust & Banking Co., Japan's seventh-largest publicly listed lender.

The yen climbed to 126.25 per euro as of 10:19 a.m. in Tokyo from 127.31 late yesterday in New York. Against the dollar, it advanced to 98.46 from 98.61. The euro fell to $1.2826 from $1.2915. The pound weakened to $1.6357 from $1.6451. The Australian dollar slumped to 66.72 U.S. cents from 68.23 in New York. The yen may rise to 97.50 per dollar today, Kitakura said.

Against the Australian dollar, the yen gained to 65.65 from 67.24 late yesterday in New York. It also rose to 57.77 versus the New Zealand dollar from 58.33. The Nikkei 225 Stock Average declined 2.4 percent, breaking a three-day winning streak.

The Japanese currency is popular in carry trades, where purchases of higher-yielding assets are funded in nations with lower rates. Japan's key rate of 0.5 percent compares with 6 percent in Australia and 6.5 percent in New Zealand.

Monthly Performance

The euro headed for the biggest monthly declines against the yen and the dollar since its debut in 1999 as investors sought protection from deepening credit-market losses and a global stocks rout. The single currency has dropped 16 percent versus the yen in October and 9 percent against the dollar. The greenback is down 7.3 percent against the yen, the biggest decline since 1998, when hedge fund Long-Term Capital Management LP collapsed.

The world's largest economy suffered its biggest contraction since 2001 in the third quarter, ushering in what may be the worst recession in 25 years as consumer and business spending falter. U.S. gross domestic product shrank 0.3 percent, the Commerce Department reported yesterday in Washington.

Gains in the yen may be limited by speculation the Bank of Japan will reduce its target lending rate for the first time since March 2001.

Japan's central bank will cut its target rate to 0.25 percent from 0.5 percent, according to the median forecast of economists surveyed by Bloomberg News. The BOJ will release its decision later today in Tokyo. The yen slumped the most since 1974 versus the dollar on Oct. 28 after the Nikkei newspaper said policy makers are leaning toward lowering rates.

BOJ Rates

Japan's core inflation, which excludes fresh food, slowed to a 2.3 percent pace in September from 2.4 percent the previous month, the government said today, giving the central bank more scope to lower rates.

The Group of Seven industrial nations expressed concern this week about the yen's ``excessive volatility,'' and Japan's Finance Minister Shoichi Nakagawa said the government was ready to act if needed to limit the recent gains.

``Investors will continue to reverse their bets on yen gains,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``The chance of a BOJ rate cut gives the yen a weak bias.''

The yen may decline to 99 per dollar and 130 versus the euro today, he said.

The dollar gained versus the euro on speculation overseas investors in U.S. stocks bought the greenback at the end of the month to keep their currency hedge ratios constant, according to Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. The Standard & Poor's 500 Index is down more than 18 percent in October.

Month-End Squaring

``Foreign investors buying U.S. equities sell the dollar as a hedge,'' said Osborne. ``Because the value of the stocks has declined so much, they have to buy back the dollar to maintain their hedge ratios.''

The Federal Reserve reduced the target lending rate by a half-percentage point to 1 percent on Oct. 29, the lowest since June 2004 and matching the level during the Eisenhower administration in the late 1950s. Central banks in China, Taiwan, Hong Kong and the Middle East also lowered borrowing costs this week as policy makers race to avert a global recession.

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