Yen Rises to 3-Year High on Concern Rate Cuts May Fall Short

By Ye Xie and Kim-Mai Cutler
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Oct. 8 (Bloomberg) -- The yen rose to a three-year high against the euro and gained versus the dollar on concern interest-rate cuts by global central banks may fail to boost confidence, encouraging the sale of higher-yielding assets.

Japan's currency surged against the Australian dollar, the New Zealand dollar and the Norwegian krone on speculation deepening credit market turmoil will lead to a drop in carry trades. The Mexican peso and the Brazilian real plunged versus the greenback on reduced demand for emerging-market currencies.

``They waited too long to sort these things out,'' said Scott Ainsbury, a portfolio manager who helps manage $14.6 billion in currencies at New York-based FX Concepts Inc. ``It's not enough. You buy nothing else but the dollar and the yen.''

The yen gained 0.3 percent to 137.49 per euro at 10:02 a.m. in New York, from 137.89 yesterday. It touched 134.17, the strongest level since August 2005. Japan's currency advanced 0.9 percent to 100.53 per dollar from 101.47. The dollar depreciated 0.7 percent to $1.3676 per euro from $1.3588. It touched $1.3444 on Oct. 6, the strongest since August 2007, when the credit market crisis gathered momentum.

The Federal Reserve reduced its target lending rate by a half-percentage point to 1.5 percent, while the European Central Bank and the central banks of the U.K., Canada, Sweden and Switzerland also reduced rates. Separately, China's central bank lowered its key one-year lending rate.

Surging Yen

The yen gained 6 percent to 67.35 against the Aussie, 4.3 percent to 60.57 versus the New Zealand dollar and 1 percent to 16.22 against the krone on bets investors will abandon trades in which they get funds in a country with low borrowing costs buy assets where returns are higher.

The Bank of Japan held its target lending rate at 0.5 percent yesterday, compared with 7.5 percent in New Zealand and 5.75 percent in Norway. The Reserve Bank of Australia cut its target rate by 1 percentage point to 6 percent yesterday.

Implied volatility on one-month euro-dollar options reached 20.11 percent, an all-time high. Implied volatility on one-month dollar-yen options soared to 25.42 percent, the highest since October 1998.

The real dropped 6 percent to 2.4501 against the dollar, while the peso declined 7 percent to 13.2339.

Finance ministers and central bankers from the Group of Seven nations will meet in Washington on Oct. 10 to discuss the financial crisis. Measures to stabilize global stock markets will be on the agenda, according to a Japanese official who briefed reporters on condition of anonymity before the central banks' announcement. The G-7 comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

G-7 Meeting

``The actions are a good sign for the upcoming G-7 meeting,'' said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank. ``It's showing that some sort of coordination may be taking place.''

The ECB's main refinancing rate is now 3.75 percent; Canada's fell to 2.5 percent; the Bank of England's rate dropped to 4.5 percent; and Sweden's rate declined to 4.25 percent. Separately, China cut interest rates for the second time in three weeks, reducing the main rate to 6.93 percent.

The Fed also cut its rate on direct loans to banks, the so- called discount rate, by a half-point to 1.75 percent. The U.S. central bank said yesterday it would set up a special vehicle to buy commercial paper and help revive the corporate-debt market.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net