Yen to Rise to 95 on Carry-Trade Unwind, Says JPMorgan's Sasaki

By Candice Zachariahs and Ron Harui

Oct. 13 (Bloomberg) -- The yen may extend gains against the U.S. dollar as Japanese investors start selling some of their more than $1.3 trillion in overseas assets to bring money home because of a global slump in equities, JPMorgan Chase & Co. said.

The yen may advance to 95 per dollar should Japanese investment trusts, insurance companies and pension funds start selling foreign holdings, wrote Tohru Sasaki, chief strategist in Tokyo at JPMorgan and a former chief currency trader at the Bank of Japan, in a research note dated Oct. 10. Retail traders held $24 billion of bets the yen will decline on Oct. 9, down 50 percent from last month, the bank said in a report.

``Minor changes in hedging strategy or smaller capital outflows from Japan could easily see the U.S. dollar-yen hit 95 near term,'' wrote Sasaki. ``The yen, which has now become the strongest currency in the world, looks set for further appreciation.''

The yen rose for the third straight day, advancing 0.8 percent to 99.87 per dollar at 12:04 p.m. in Tokyo from 100.67 yen late in New York on Friday. It rose to a seven-month high of 97.92 on Oct. 10 and has gained 8 percent over the past month.

The yen was little changed against the euro after European leaders agreed to guarantee bank borrowing and bolster big lenders.

The euro declined to 134.76 yen, from 134.96 at the end of last week. It gained 0.6 percent to $1.3489, from $1.3408 late in New York on Oct. 10.

Gains in the euro may be limited by speculation the European Central Bank will lower borrowing costs to stimulate the economy, reducing the 15-nation region's interest-rate advantage over the U.S. and Japan, according to UBS AG.

Interest Rates

``Over a longer time horizon, if we avoid a meltdown in the financial system, evolving yield differentials should be supportive of the yen and the U.S. dollar, as European countries have further room to cut interest rates in response to slowing global growth,'' wrote Ashley Davies, a currency strategist in Singapore at UBS, in a research note today.

The ECB's benchmark rate of 3.75 percent compares with 1.5 percent in the U.S. and 0.5 percent in Japan. Traders raised bets on an ECB rate cut this year. The implied yield on the December Euribor futures contract dropped to 4.075 percent today from 4.145 percent on Oct. 10.

Losses in the dollar may be limited on speculation the U.S. government is taking steps at a faster pace than European authorities in resolving the global financial crisis, according to Brown Brothers Harriman & Co.

``Given that we believe the U.S. remains ahead of the curve in terms of policy responses to the credit crisis, we remain dollar bulls and continue to view dollar weakness as a buying opportunity,'' wrote analysts led by Marc Chandler, New York- based head of currency strategy at Brown Brothers Harriman in a research note yesterday.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.netRon Harui in Singapore at rharui@bloomberg.net