Yen Rises to Near Three-Year High Versus Euro on Rate Outlook

By Ye Xie and Agnes Lovasz

Oct. 21 (Bloomberg) -- The yen climbed to near a three-year high against the euro on speculation central banks will lower borrowing costs to limit the global economic slump, encouraging investors to sell higher-yielding assets funded in Japan.

The euro fell to a 19-month low against the dollar on bets the European Central Bank will cut interest rates at a faster pace than the Federal Reserve. The Australian dollar declined against the greenback after the Reserve Bank of Australia said it saw a ``strong economic case'' for its Oct. 7 interest-rate reduction, fueling expectations for another cut.

``The economic fallout of the crisis will lead to more aggressive policy actions in major countries,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``The yen and the dollar will be the beneficiaries.''

The yen rose 1.9 percent to 133.32 per euro at 9:48 a.m. in New York, from 135.92 yesterday. It touched 132.24 on Oct. 10, the strongest since level June 2005. The yen advanced 0.8 percent to 101 per dollar from 101.86. The euro fell 1.1 percent to $1.3199 from $1.3344 after touching $1.3154, the lowest level since March 2007. The euro will depreciate to $1.26 in eight weeks, Fitzpatrick said.

The Canadian dollar extended its decline after the Bank of Canada reduced its benchmark interest rate by a quarter- percentage point to 2.25 percent. The currency dropped as much as 1.7 percent to C$1.2113 per U.S. dollar.

Yen vs. Real

Japan's yen rose 4.6 percent to 45.97 versus the Brazilian real and 2.51 percent to 61.91 per New Zealand dollar on bets investors will 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 rate compares with 13.75 percent in Brazil and 7.5 percent in New Zealand.


Investors bet the ECB will lower borrowing costs by another 0.75 percentage point by June after cutting the main refinancing rate by a half-percentage point to 3.75 percent on Oct. 8 as part of coordinated reductions by major central banks.

The implied yield on the three-month Euribor contract expiring in June fell to 3.25 percent, the lowest level since January 2006. The yield has been 0.23 percentage point higher than the benchmark rate on average over the past year. The Fed will cut its benchmark rate by at least a half-percentage point from 1.50 percent at its Oct. 29 policy meeting, futures on the Chicago Board of Trade indicate.

``Concerns over a European economic downturn are intensifying,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. ``An ECB rate cut is possible. The euro is becoming a very weak currency.''

Stark on Rates

The currency shared by 15 European countries fell to its lowest level against the dollar since March 2007 after ECB Executive Board member Juergen Stark said in an interview with the radio station Deutschlandfunk that he sees risks for one or two more ``accidents'' in financial markets.

The dollar has gained 18 percent since touching a record low of $1.6038 per euro on July 15 on speculation the U.S. currency will benefit as the European economy slows.

The greenback gained yesterday after Fed Chairman Ben S. Bernanke called yesterday for government-stimulus measures to avert a prolonged recession.

U.S. lawmakers should consider ``measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,'' Bernanke said in testimony to the House Budget Committee yesterday. The White House said it's ``open'' to the idea of a new plan, having previously withheld support for additions to a $168 billion package approved in February.

Stop Losses

The dollar's gain against the euro accelerated after stop losses on investors' long positions on the euro were activated when the $1.3260 level was broken, said Antje Praefcke, a currency strategist in Frankfurt at Commerzbank. A stop loss is an automatic order to buy or sell an asset should it reach a particular level.

Praefcke expects the dollar to trade at $1.34 per euro at year-end and to strengthen to $1.25 by the end of 2009. That compares with a median estimate of $1.40 and $1.33 in a survey of analysts by Bloomberg News.

The Australian dollar fell 2.6 percent to 68.63 U.S. cents as minutes of the Reserve Bank's Oct. 7 meeting released today showed policy makers said inflation will slow at a faster rate than previously expected as the global economy slows.

Citic Pacific Ltd., the Hong Kong arm of China's biggest state-owned investment company, said yesterday it may lose as much as HK$15.5 billion ($2 billion) on unauthorized currency contracts that went sour as the Australian dollar declined. The currency plunged 28 percent since June 30 against the dollar, the most among the 16 most-active currencies.

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