Yen Advances as Drop in Stocks Reduces Appeal of Carry Trade

By Daniel Kruger and Michael J. Moore

Nov. 15 (Bloomberg) -- The yen rose against the euro and the dollar for a second week as falling stock market prices prompted speculation investors will sell higher-yielding assets and pay back low-cost loans in Japan's currency.

The greenback appreciated versus an index of the currencies of six major U.S. trading partners as investors sought the safety of dollar-denominated assets. The pound recorded its biggest loss against the euro since the 15-nation currency's 1999 debut on mounting evidence Britain's economy has fallen into a recession.

``Euro-dollar and euro-yen were highly leveraged plays over the last several years,'' said John McCarthy, director of currency trading at ING Financial Markets LLC in New York. ``We continue to see unwinding of that.''

The yen advanced 1.1 percent to 97.14 per dollar, from 98.24 on Nov. 7. It appreciated 2 percent to 122.39 per euro from 124.90. The dollar traded $1.2605 per euro, compared with $1.2718. The pound fell by a record 5 percent against the euro to 85.41 pence and dropped 5.8 percent to $1.4740, decreasing below $1.50 for the first time since June 2002.

The ICE's Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and the Swedish krona, increased 0.5 percent this week and reached 88.15 on Nov. 13, the highest level since April 2006.

Russia's ruble had its biggest weekly drop since early September against a basket of dollars and euros that the central bank uses to manage its fluctuation after policy makers let the currency weaken to slow an exodus of foreign capital. The ruble decreased 1.2 percent to 30.6994 against the basket, which is made up of 55 percent dollars and 45 percent euros.

Canadian Dollar

The Canadian dollar fell 4 percent to C$1.2372 against the dollar and the Norwegian krone declined 0.7 percent to 6.9539 as the price of crude oil for December delivery plunged 7.4 percent this week. Oil accounted for one-tenth of Canada's export revenue last year, while Norway is the world's fifth-largest oil supplier.

Japan's currency advanced 4.9 percent to 62.95 against the Australian dollar and 7.4 percent to 53.79 versus the New Zealand dollar this week on bets investors will unwind carry trades, in which they get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.3 percent target lending rate compares with 1 percent in the U.S., 5.25 percent in Australia and 6.5 percent in New Zealand.

Stock markets in the U.S., Europe and Asia fell this week as reports showed the global economic slowdown deepened. The Standard & Poor's 500 Index fell 6.2 percent, the Dow Jones Stoxx Index of European equities retreated 6.3 percent and the MSCI Asia Pacific Index lost 5.7 percent.

U.S. Retail

Sales at U.S. retailers fell 2.8 percent in October, the biggest drop since records began in 1992, the Commerce Department reported in Washington. The Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly rose to 57.9 this month from 57.6 in October.

Europe's economy fell into its first recession in 15 years in the third quarter. Gross domestic product in the euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's Luxembourg-based statistics office said.

U.K. unemployment rose the most in 16 years last month, and Bank of England Governor Mervyn King said policy makers are ``certainly prepared'' to cut the 3 percent target lending rate.

Volatility implied by dollar-yen options expiring in one month rose to 28.55 percent on Nov. 13, the highest in almost two weeks. Heightened fluctuations in currencies can discourage carry trades by making profits harder to predict.

`Choppy' Markets

``The markets are extremely choppy, illiquid and subject to extremely wide swings on virtual air,'' said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. ``I wouldn't suggest the markets are trading on economics as much as on equity flows at this moment.''

Leaders of G-20 countries convened in Washington to debate proposals ranging from curbing executive pay and restraining hedge funds to raising capital requirements for banks after financial institutions worldwide lost $958 billion on securities tied to U.S. mortgages.

``The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain,'' Federal Reserve Chairman Ben S. Bernanke said yesterday at a panel discussion hosted by the ECB in Frankfurt. ``For this reason, policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.''

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net