Yen Tumbles as Global Interest-Rate Cuts Revive Risk Appetite

By Ye Xie and Kim-Mai Cutler

Oct. 9 (Bloomberg) -- The yen fell the most in three weeks against the euro as a flurry of central bank interest-rate cuts helped arrest a slump in global stocks, curbing sales of higher- yielding assets funded in Japan.

Japan's currency also tumbled versus the U.S., Australian and New Zealand dollars as equities in the U.S., Asia and Europe rebounded. The Mexican peso and the Brazilian real rose for the first time this month, one day after their central banks drew on their foreign reserves to defend the currencies.

``The central banks broke the fear dynamic and the market is settling down a bit,'' said David Watt, a senior currency strategist at RBC Capital Markets in Toronto, a unit of Canada's biggest bank by assets. ``The hope is we may have reached the peak of the crisis. When things cool down, we are seeing some weakness in the yen.''

Japan's currency fell 2.2 percent to 138.35 versus the euro at 9:40 a.m. in New York, from 135.39 yesterday when it touched 134.96, the strongest since August 2005. It earlier fell as much as 3.2 percent, the biggest drop since Jan. 11, 2001. The yen declined 2.1 percent to 101.23 per dollar. It touched 98.61 yesterday, the strongest since March 27. The euro rose 0.1 percent to $1.3672.

Brazil's real jumped as much as 7.4 percent to 2.16 per dollar, the biggest one-day gain since August 2002. Brazil's central bank sold dollars for the first time in five years yesterday when the currency fell to 2.55, the lowest since April 2005.

Mexico's peso rose 2.6 percent to 12.0051 per dollar. Mexico offered $2.5 billion in the spot market yesterday after the peso tumbled as much as 16 percent, the most since 1994.

Carry Trades

Japan's yen weakened 6.9 percent to 70.76 against the Australian dollar and dropped 4.8 percent to 62.41 per New Zealand dollar. Yesterday, the yen jumped to 63.78 versus the Aussie and 57.31 against the kiwi, the highest levels since September 2002.

The Standard & Poor's 500 Index rose 1.4 percent. The MSCI World Index rose 0.9 percent. It lost 15 percent in the past five days, the biggest drop since October 1987 on concern the global economy is headed for a recession as credit markets to seize up.

The yen has surged 19 percent versus the Australian dollar, 14 percent against New Zealand's currency and 8 percent against the euro this month as investors pared so called carry trades, in which 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.

G-7 Meeting

Investors are reluctant to buy the yen before Group-of- Seven ministers meeting tomorrow as the currency's gain may be ``starting to breach the comfort zone'' of the officials, said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly traded bank.

G-7 finance ministers and central bankers will meet for two- days in Washington to discuss the financial crisis, which has already led to bank bailouts in most of the member nations. The group comprises Canada, France, Germany, Italy, the U.K., the U.S. and Japan.

Technical indicators suggested the yen was poised to fall, after reaching a three-year high against the euro yesterday. The 14-day relative strength index for the Japanese currency was at 82 yesterday, above the level of 70 that signals a reversal may occur. It was at 74 today. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast price changes in a currency.

`One-Sidedly Positioned'

The dollar's one-month 25-delta risk-reversal rate against the yen was 6.7 percent today, the most since March 17, signaling traders demand a greater premium for yen calls, which allow for purchases, over puts, which grant the right to sell. Against the Australian dollar, the risk reversal rate was 8.3 percent.

``The options market is very one-sidedly positioned, so it's not surprising with some risk aversion carefully fading'' to see the yen fall, said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt.

Implied volatility on one-month dollar-yen options, a measure of expectations for future currency moves, fell to 20.09 percent from 25.05 percent yesterday, when it reached 26.42 percent, the highest since Oct. 20, 1998. Lower volatility may encourage carry trades as it indicates a smaller risk of exchange-rate fluctuations.

Krona Crumbles

The Federal Reserve reduced its target lending rate by a half-percentage point to 1.5 percent yesterday, while the European Central Bank and counterparts from the U.K., Canada, Sweden and Switzerland also announced cuts. Central banks in China, Hong Kong and Taiwan lowered their key rates and the Bank of Korea cut its benchmark for the first time in four years.

Trading in the Icelandic krona came to a halt after the government seized control of Kaupthing Bank hf, the nation's biggest lender, as the financial crisis deepens.

There haven't been any so-called krona spot trades today, or transactions in which currency must be exchanged immediately, according to Stockholm-based Nordea Bank AB and TD Securities Ltd. in London. The last spot trade was at 340 krona per euro, Nordea said.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net;