By Stanley White
Oct. 10 (Bloomberg) -- The yen rose against the dollar, headed for its biggest weekly gain in a decade, on speculation a global stock market rout will prompt investors to pare holdings of higher-yielding assets funded with the Japanese currency.
The yen was also on course for its largest weekly gain versus the euro as the Dow Jones Industrial Average and Nikkei 225 Stock Average both fell below 9,000 for the first time since 2003 on signs that carmakers will be the next victims of the credit crisis. Group-of-Seven finance ministers and central bankers will meet today and tomorrow in Washington to discuss the financial turmoil, which has already led to interest-rate cuts and bank bailouts in most of the member nations.
``The basic trend is to buy the yen,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``The credit crunch is spreading from the financial sector to other companies, meaning currency traders can't take on risk. The G-7 may not be able to repair money markets quickly enough.''
The yen rose to 98.61 per dollar at 9:23 a.m. in Tokyo from 99.82 late yesterday in New York, headed for a 6.8 percent gain this week. It earlier touched 97.92, the strongest since March 19. Japan's currency was at 133.70 versus the euro from 135.83 yesterday and 145.11 at the end of last week. It earlier reached 132.83, the strongest since July 2005. The euro fell to $1.3565 from $1.3604, on course for its second weekly decline. The yen may rise to 98 per dollar today, Amikura said.
Against the Australian dollar, the yen traded at 66.34, on course for a 23 percent gain this week. The yen soared by 18 percent against the New Zealand dollar this week to 59.05.
MAS Policy
The Singapore dollar fell S$1.4767 per greenback from S$1.4686 after the Monetary Authority of Singapore shifted policy to seek zero appreciation in the trade-weighted band for the currency as the economy slows.
The Nikkei 225 Stock Average tumbled as much as 11 percent and the Dow plunged 7.3 percent yesterday. General Motors Corp. slumped to a 58-year low as the credit crisis has reduced potential car buyers' access to loans.
``It's an absolute panic in stocks,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. ``The market wants to see action. Bad assets need to be taken off balance sheets, new capital needs to be added and then we might, maybe, get a respite.''
Carry Trades
The yen has surged 19 percent versus the Australian dollar, 15 percent against New Zealand's currency and 9 percent against the euro this month as investors pared so called carry trades, in which investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. Japan's benchmark rate is 0.5 percent, compared with 6 percent in Australia and 7.5 percent in New Zealand.
``As global financial stability risks remain acute and questions are mounting about the follow-on effects to global growth prospects, this keeps deleveraging and risk retrenchment on center stage,'' wrote Ron Leven, currency strategist at Morgan Stanley in New York, in a research note yesterday. ``We are short dollar-yen, euro-yen and pound-yen.'' A short is a bet a currency will fall.
Risk Reversals
The dollar's one-month 25-delta risk-reversal rate against the yen was 6.7 percent yesterday, the most since March 17, signaling traders demand a greater premium for yen calls, which allow for purchases, over puts, which grant the right to sell.
``The yen is probably going to continue strengthening here,'' said Sophia Drossos, a currency strategist at Morgan Stanley in New York, in an interview with Bloomberg News. ``The funding market friction we've seen and continued financial market volatility are now spilling over to the concern about global growth outlook.''
The dollar touched a 14-month high of $1.3444 per euro on Oct. 6 as the freeze-up of credit markets and global stock losses boosted the demand for U.S. Treasuries. Banks' reluctance to lend to each other also caused a shortage of dollars for funding, accelerating the currency's gain.
Coordinated interest-rate reductions by major central banks on Oct. 8 failed to revive lending among banks. The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent yesterday, the highest level since Dec. 28.
U.S. Treasury Secretary Henry Paulson and top aides are still considering options on how to proceed with a $700 billion bank bailout plan, including having the government obtain preferred stock, two officials informed of the matter said. Paulson and Federal Reserve Chairman Ben S. Bernanke will meet with their counterparts from the G-7 group, which comprises Canada, France, Germany, Italy, the U.K., the U.S. and Japan.
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net
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