Yen Rises to 13-Year High Versus Dollar as Carry Trade Unwinds

By Agnes Lovasz and Ye Xie

Oct. 24 (Bloomberg) -- The yen climbed to a 13-year high against the dollar as the plunge in U.S. stock-index futures reached allowed limits, encouraging investors to dump higher- yielding assets funded by low-cost loans in Japan.

Japan's currency surged to the strongest in six years against the euro, posting its biggest gain ever, as the prospect of a deepening global recession prompted the unwinding of carry trades. The pound fell below $1.53 in its biggest drop in at least 37 years after the U.K. economy shrank more than forecast in the third quarter, bringing it to the brink of recession.

``I've never seen this before in terms of global financial market carnage,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Those who haven't got out of the yen carry trade will have to watch it collapse.''

The yen rose 4.8 percent to 92.66 per dollar at 9:08 a.m. in New York, from 97.31 yesterday, after touching 90.93, the strongest level since August 1995. The yen climbed 6.9 percent to 117.25 per euro from 125.89. It gained as much as 9.6 percent, the most on an intraday basis since the euro's inception in 1999. It touched 113.81, the strongest since May 2002. The dollar rose 2.2 percent to $1.2647 per euro after touching $1.2497, the strongest since October 2006.

Japan's currency rose 8.9 percent this week against the dollar, the biggest gain since October 1998. It surged 14 percent against the euro, the biggest weekly advance since the 15-nation currency's 1999 debut. The euro headed for a 6 percent decline versus the dollar, its biggest loss ever.

Dollar's Gain

The dollar gained against every currency except the yen and the Swiss franc today as investors sought a haven. The U.S. currency appreciated 5.1 percent to 2.3755 Brazilian reais and 2.6 percent to 7.8597 Swedish krona.

The pound fell to $1.5269, the lowest level since August 2002, as the Office for National Statistics said today that U.K. gross domestic product dropped 0.5 percent from the second quarter, the first contraction since 1992. Economists had predicted a 0.2 percent decline, according to the median of 35 forecasts in a Bloomberg News survey. Against the euro, the pound weakened to a record 81.96 pence, from 79.69 pence.

The yen gained 13.5 percent to 57.42 against the Australian dollar and 12.4 percent to 51.51 versus the New Zealand currency on speculation the rout in global stocks will encourage investors to unwind carry trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 6 percent in Australia and 6.5 percent in New Zealand.

Aussie's Weekly Drop

The Aussie lost 19 percent versus the yen this week and one third of its value this month. The kiwi declined 18 percent this week and 28 percent in October.

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 cut carry trade profits. It rose 32.175 percent on Oct. 10, the highest since Bloomberg began compiling data in December 1995.

Trading in futures on the Standard & Poor's 500 Index and the Dow Jones Industrial Average was limited today after declines in the contracts of more than 6 percent triggered a so- called limit-down restriction.

The futures will not trade below 855.20 until U.S. exchanges open for regular trading at 9:30 a.m. New York time, said Jeremy Hughes, a London-based spokesman for the Chicago Mercantile Exchange. Dow Average futures won't trade below the 8,224 level, he said. The ``limit down'' suspension allows both contracts to trade above those levels, he said.

Global Stock Rout

The MSCI World Index of shares lost 3.6 percent. It has fallen 44 percent in 2008 as credit losses and writedowns topped $660 billion in the worst financial crisis since the Great Depression. Europe's Dow Jones Stoxx 600 Index fell 7.1 percent, and the MSCI Asia Pacific Index sank 5.4 percent.

``There's a powerful de-leveraging and risk-aversion dynamic globally across all financial markets and that's helping prompt the strengthening of the yen,'' said Robert Minikin, a currency strategist with Standard Chartered in London. ``We're seeing a lot of weakness in higher-yielding currencies and the yen is performing well. As balance sheets shrink and assets are repatriated, that can help the U.S. dollar.''

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.

Loan Exposure

The euro and the pound may weaken because 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.

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.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net