Yen Surges to Six-Month High as Stocks Drop, Carry Trades Cut

By Stanley White and Ron Harui

Oct. 8 (Bloomberg) -- The yen surged, breaching 100 per dollar for the first time in six months, after a plunge in Asian stocks prompted investors to reduce holdings of higher-yielding assets funded in Japan.

The currency also advanced to the strongest in three years versus the euro after the International Monetary Fund said the world economy is headed for a recession next year. Gains accelerated as benchmark stock indexes in Japan, Hong Kong, South Korea, Indonesia, Singapore, Taiwan and Thailand slid more than 5 percent.

``Lingering fears about the health of financial sectors in the U.S. and Europe and concerns over a global recession should continue to underpin the yen,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. ``We're far from out of the woods and any restoration of investor confidence will take time.''

Japan's currency rose to 100.23 per dollar at 7:53 a.m. in London from 101.47 late yesterday in New York. It reached 99.61, the highest since April 1. The yen climbed to 136.08 against the euro from 137.89. It reached 135.04, the strongest since September 2005. The dollar fell to $1.3634 per euro from $1.3588.

Against the Australian dollar, the yen rose to 68.74 from 72.84 late yesterday in Asia. It also advanced to 61.65 per New Zealand dollar from 64.11. The Australian dollar fell as low as 67.49 U.S. cents, the weakest level since September 2003. New Zealand's dollar weakened 2.8 percent to 61.15 U.S. cents.

Stocks Slide

The yen advanced as Asian money market rates rose, reflecting the reluctance among banks to lend as finance companies fail. The Hong Kong's three-month interbank offered rate rose 29 basis points to 4.15 percent, even as Hong Kong's central bank slashed the rate at which it lends to banks.

South Korea's won slid 5 percent to 1,395 against the greenback, the lowest in a decade, as a seizure in global credit markets forced companies to turn to currency exchanges to meet their dollar needs. Asia's 10 most-active currencies outside of Japan all declined today.

The region's shares also tumbled, extending a global sell- off that's erased more than $5 trillion of market value in the past week. The world economy is headed for a recession next year, with U.S. growth forecast at 0.1 percent, according to International Monetary Fund reports published this week.

The stocks rout deterred carry trades, in which investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. Benchmark rates are 0.5 percent in Japan, 4.25 percent in Europe, 5 percent in the U.K., 6 percent in Australia and 7.5 percent in New Zealand.

The risk of a carry trade is that currency moves wipe out profits. Implied volatility on one-month dollar-yen options soared to 25.56 percent, the highest since October 1998, from 21.79 percent yesterday.

U.S. Rates

The dollar may weaken further against Japan's currency as the Federal Reserve signals it's prepared to lower interest rates. Philadelphia Fed President Charles Plosser speaks on monetary policy at 7:45 a.m. in New York today.

The Fed ``will need to consider whether the current stance of policy remains appropriate,'' Chairman Ben S. Bernanke said yesterday after the U.S. central bank decided to buy commercial paper and help revive the corporate debt market.

``The dollar is likely to edge lower,'' said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., Japan's fifth-largest broker by revenue. ``A possible Fed rate cut highlights how dire the situation is in the U.S. The fundamentals simply aren't sound.''

Futures on the Chicago Board of Trade showed yesterday a 68 percent chance the Fed will lower its 2 percent target lending rate by a half-percentage point at its Oct. 29 policy meeting, up from 42 percent a day earlier.

U.K. Bank Plan

The British pound rose after Prime Minister Gordon Brown's government said it will inject about 50 billion pounds ($87 billion) into the nation's banks.

The U.K. government nationalized Northern Rock Plc and Bradford & Bingley Plc to save them from collapse this year. The pound climbed $1.7513 from $1.7455 yesterday. It advanced to 77.41 pence per euro from 77.87.

The Bank of England will reduce its 5 percent benchmark rate by a quarter-percentage point tomorrow, according to the median forecast of economists surveyed by Bloomberg News. Finance ministers and central bankers from the Group of Seven nations will meet in Washington the next day to discuss the deepening financial crisis.

G-7 Meeting

The ministers will discuss stabilizing global stock markets, said a Japanese official who briefed reporters on condition of anonymity. Joint action on currencies and interest rates should depend on economic conditions in member countries, the official said. The G-7 includes Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

UBS AG recommends investors buy the dollar at 102.40 yen, with a target of 107, as governments work to restore confidence in the global financial system.

``The market has reasons to respond positively to efforts from officials in Europe and the U.S.,'' wrote analysts led by Benedikt Germanier, a Stamford, Connecticut-based currency strategist at UBS, in a research note yesterday. ``Efforts may soon reach a critical level in our view, helping investors' sentiment.''

The yen also may gain as Japanese investors repatriate funds to cover for potential losses before the fiscal year ends in March, said Tomoko Fujii, Tokyo-based head of economics and strategy at Bank of America Corp.

``There's still an upside risk to the yen,'' Fujii said, confirming a research note dated yesterday. ``Japanese financial institutions are not very profitable. Domestic equities are weak, which means no valuation gain cushion. In that case, there could be serious repatriation pressure.''

To contact the reporters on this story: Stanley White in Tokyo at Swhite28@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net