By Kim-Mai Cutler and Andrew MacAskill
Oct. 10 (Bloomberg) -- The yen headed for its biggest weekly gain in a decade against the dollar as the global stock- market rout caused investors to sell higher-yielding assets funded with the Japanese currency.
The yen was also on course to rise versus the euro by the most in any week since the common currency's debut as Germany's DAX Index tumbled more than 10 percent and Japan's Nikkei 225 Stock Average had its biggest drop on record. Group of Seven finance ministers and central bankers meet today in Washington to discuss a crisis that has wiped more than $8 trillion off the value of global stocks this month and led to interest-rate cuts and bank bailouts in most of the member nations.
``Fear has gone through the roof with equity market volatility trading the highs,'' said Jeremy Stretch, senior strategist in London at Rabobank International. ``That kind of environment is seeing investors flee for safety and so we have seen the yen holding up remarkably well. Risk aversion continues to be the name of the game.''
The yen rose to 99.15 per dollar at 8:58 a.m. in London from 99.82 yesterday in New York, up 6.3 percent on the week. It touched 97.92, the strongest since March 19. Japan's currency was also at 134.97 per euro, from 145.11, heading for the largest weekly gain since 1999. Earlier, the yen reached 132.83, the strongest since July 2005.
Coordinated interest-rate reductions by central banks in the U.S., Europe and Asia in the past two days failed to revive lending among banks, putting stocks on course for their worst week in 30 years. The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent yesterday, the highest level since Dec. 28.
Considering Options
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 acquire 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.
The euro fell to $1.3581 from $1.3604, on course for its second weekly decline versus the dollar. The British pound fell as low as $1.6792, breaching the $1.7000 level for the first time since November 2003. The yen traded at 64.96 against the Australian dollar, taking its gain this week to 25 percent. Japan's currency strengthened 19 percent against the New Zealand dollar this week, and traded at 58.49.
MAS Policy
The South Korean won surged as much as 11 percent to 1,224.95 per dollar after a meeting among financial regulators fueled speculation the government will intervene to support the currency, which yesterday reached a decade-low 1,485.32. The nation's foreign-exchange reserves dropped in each of the past six months, sliding $24.6 billion to $239.7 billion as the Bank of Korea used the funds to stem the won's slide.
The Singapore dollar fell to S$1.4789 against the greenback from S$1.4686 after the Monetary Authority of Singapore ended a policy favoring gains in its currency as the economy slows.
Japanese Finance Minister Shoichi Nakagawa said yesterday in Washington that he is closely watching the stock and currency markets and he will consider all options in tackling the financial crisis. The MSCI World Index is down almost 19 percent this week, its worst performance in three decades.
Carry Trades
The yen has surged 28 percent versus the Australian dollar, 20 percent against New Zealand's currency and 11 percent against the euro this month as traders reversed so-called carry trades. In such transactions, 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.
``Global financial stability risks remain acute and questions are mounting about the follow-on effects to global growth prospects,'' 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.
The dollar's one-month 25-delta risk-reversal rate against the yen widened to minus 7.1 percent today, the most since Bloomberg began compiling data in October 2003, signaling traders demand a greater premium for yen calls, which allow for purchases, over puts, which grant the right to sell.
Implied volatility on one-month dollar-yen options, a measure of expectations for future currency moves, rose to 31.47 percent, the highest since Bloomberg began compiling the data in 1996. Higher volatility discourages carry trades as it indicates a greater risk of exchange-rate fluctuations.
Mirroring Stocks
Currency volatility mirrored turbulence in global stock markets as the VIX, the Chicago Board Options Exchange Volatility Index surpassed 60 for the first time. The VIX jumped 11 percent to 63.92 yesterday.
The dollar touched a 14-month high of $1.3444 per euro on Oct. 6 as the freeze in credit markets and global stock losses boosted 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.
Japan will propose at the G-7 meeting that the International Monetary Fund establish a lending program to help emerging countries deal with the financial crisis, the Nikkei newspaper reported today, without citing anyone. The program would be funded with foreign-exchange reserves from Japan, China, Middle Eastern and developed countries, the newspaper said.
``I can't imagine the U.S. would agree to such a plan,'' said Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly listed lender. ``This could threaten demand for Treasuries at a time when the U.S. needs to borrow money for its bank bailout. This is also a negative for the dollar.''
European Rates
The euro headed for a second weekly loss against both the dollar and the yen on speculation the credit crisis in Europe will deepen, prompting the European Central Bank to cut interest rates. The bank lowered its benchmark rate two days ago for the first time in five years.
The currency has fallen 7.3 percent versus the yen this week, the most since the euro's debut in 1999. ECB policy makers said yesterday they expect the region's economic growth will remain weak for some time.
``Right now, financial institutions in Europe appear to be in trouble,'' said Hiroshi Yoshida, a foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan's fifth-largest publicly traded lender by assets. ``The ECB may reduce rates further. The euro is likely to retest the downside.''
The odds of a rate cut at the ECB's next policy meeting on Nov. 6 were 90 percent today, according to a Credit Suisse Group derivatives index.
To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net
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