Yen Weakens Against Dollar on Drop in Money-Market Rates

By Ye Xie and Kim-Mai Cutler

Oct. 16 (Bloomberg) -- The yen fell versus the dollar as a drop in money-market rates encouraged investors to resume purchases of higher-yielding assets funded by low-cost loans.

Japan's currency weakened against the South African rand and the Australian dollar as $254 billion in emergency cash from central banks revived lending between financial institutions, giving a boost to carry trades. South Korea's won fell the most against the dollar in almost 11 years after Standard & Poor's said it may cut banks' credit ratings.

``One consistent theme going forward will be continued easing of credit market conditions,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. ``That tends to weaken the yen as risk aversion abates.''

The yen declined 0.8 percent to 100.76 per dollar at 10:36 a.m. in New York, from 99.96 yesterday. Japan's currency traded at 134.74 per euro, compared with 134.93. It touched 133.38, near the strongest since June 2005. The dollar increased 0.7 percent to $1.3401 per euro, from $1.3499.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars declined for a fourth day, sliding 5 basis points, or 0.05 percentage point, to 4.50 percent, the British Bankers' Association said. The overnight rate fell 20 basis points to 1.94 percent, the lowest level since November 2004 though still 44 basis points above the Federal Reserve's target.

The dollar rose to the highest level versus the euro since March 2007 on Oct. 10, partly as banks' reluctance to lend to each other spurred a surge in demand for U.S. currency funding in global money markets.

Yen vs. Rand

Japan's currency dropped 5.2 percent to 9.88 against the South African rand and 3.2 percent to 68.24 versus the Australian dollar on speculation investors will resume trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark rate compares with 12 percent in South Africa and 6 percent in Australia.

The yen has gained 5 percent against the dollar and 10 percent against the euro this quarter as global credit market losses led investors to unwind carry trades and buy Japan's currency to repay loans.

The South Korean won fell 10.8 percent to 1,372.50 per dollar after S&P said it may downgrade Kookmin Bank and six other Korean financial companies on concern they will have difficulty refinancing maturing debts. It was the biggest drop since the aftermath of South Korea's bailout by the International Monetary Fund in December 1997.

The dollar pared its gain versus the yen after the Philadelphia Fed reported that its factory index dropped to minus 37.5 this month, the lowest reading since October 1990, from 3.8 in September. Negative readings signal contraction. The index averaged 5.1 last year.

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