Yen Trades Near Three-Year High Against Euro on Credit Concern

By Stanley White and Ye Xie

Oct. 7 (Bloomberg) -- The yen traded near a three-year high against the euro on speculation a deepening global credit crisis will encourage investors to sell higher-yielding assets and pay back low-cost loans in Japan.

The euro had its biggest one-day drop against the yen since its 1999 debut yesterday and fell below $1.35 for the first time in almost 14 months after European authorities pledged bailouts for troubled banks while stopping short of coordinated action. The Australian dollar fell to the lowest in more than five years against the yen as the Reserve Bank of Australia is expected to reduce borrowing costs today.

``The yen will rise further,'' said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co., a unit of Japan's largest brokerage. ``The lack of a unified response from Europe has unleashed a wave of risk aversion. Higher-yielding currencies are also out of favor because their interest rates will have to go lower to weather this financial storm.''

The yen traded at 137.46 per euro as of 8:24 a.m. in Tokyo from 137.50 yesterday, when it touched 135.05, the strongest since September 2005. Japan's currency was at 101.80 per dollar from 101.82. The euro was at $1.3511 from $1.3499. It touched $1.3444 yesterday, the lowest since August 2007, when the credit crisis started to gain momentum. The yen may rise to 136 per euro and 100.90 versus the dollar today, Amikura forecast.

The Australian dollar fell 4.4 percent to 73.40 yen from late yesterday in Asian trading. It earlier touched 70.32, the weakest since March 2003. The Aussie, as the currency is known, slid 3.2 percent to 72.09 U.S. cents.

Australian Rates

The RBA will lower its overnight cash rate target to 6.5 percent from 7 percent in Sydney today, adding to last month's quarter-point reduction, according to 16 of 21 economists surveyed by Bloomberg News. Five forecast a quarter-point cut.

In carry trades, investors get funds in nations with low borrowing costs and buy assets where returns are higher. The Bank of Japan will keep its benchmark interest rate at 0.5 percent today, according to a separate Bloomberg survey. That compares with 4.25 percent in Europe and 5 percent in the U.K. The risk of a carry trade is that currency moves erase profits.

The German government and the country's banks and insurers agreed on a 50 billion euro ($67.6 billion) rescue of Hypo Real Estate Holding AG over the weekend after an earlier bailout plan faltered. BNP Paribas SA, France's biggest bank, agreed to take over Belgian units of Fortis after a government rescue of the lender failed.

Stocks Fall

Stocks fell around the world yesterday as the U.S. Congress's approval of the $700 billion U.S. financial bailout on Oct. 3 failed to restore investor confidence. The Standard & Poor's 500 Index extended its worst weekly slump since 2001, while the MSCI Emerging Markets Index headed for its biggest loss in at least two decades and exchanges in Russia and Brazil halted trading.

``This is just pure capitulation and risk aversion across the board,'' said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi Ltd. in London. ``The worst-case scenario last week was for the bill going through but markets failing to respond. We pretty much got the worst-case scenario.''

Investors are pricing in wider price swings in major currencies in the coming month. Implied volatility on one-month euro-dollar options touched a record 19.3 percent yesterday, almost double the average of the past year. Volatility can erode carry-trade profit.

Rate Cuts

The prospect of a global economic slump has caused investors to raise bets that the biggest central banks will cut interest rates. The Federal Reserve will lower its 2 percent target to 1 percent by March 31, and the European Central Bank will reduce its main refinancing rate to 3 percent from 4.25 percent by the end of next year, UBS AG economists led by London-based Larry Hatheway wrote in a report Oct. 5.

German factory orders probably fell 4.7 percent in August from a year earlier, according to the median forecast of economists surveyed by Bloomberg. The Economy Ministry is due to release the report today.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net.