Yen Advances as G-20 Lacks Specifics to Boost Global Economy

By Stanley White

Nov. 17 (Bloomberg) -- The yen rose against the euro for a second day after the Group of 20 nations delayed agreeing specific measures to combat a global financial crisis, prompting investors to sell higher-yielding assets funded in Japan.

The yen also gained against the dollar before reports this week that economists estimate will show U.S. manufacturing and homebuilding sank deeper into recession. The greenback strengthened against the euro for a second day on speculation investors will avoid the risk of so-called carry trades.

``Disappointment over the G-20 meeting will spur yen gains,'' said Tsutomu Soma, a Tokyo-based bond and currency dealer at Okasan Securities Co. ``The global economy will be in trouble for a long time, so investors won't be willing to take on risk.''

The yen strengthened to 121.18 per euro as of 10:22 a.m. in Tokyo from 122.39 late in New York on Nov. 14. Japan's currency rose to 96.61 per dollar from 97.14 and Soma forecast it may reach 90.93 this week. Against the dollar, the euro fell to $1.2541 from $1.2605.

Japan's yen advanced against 15 of the 16 most-active currencies, rising the most versus the Australian dollar. It climbed 1.6 percent to 61.97 per Australian dollar and 0.9 percent to 53.22 per New Zealand dollar.

The G-20 urged a ``broader policy response'' and set a March deadline for recommendations on improving regulations at a summit that ended in Washington on Nov. 15. Leaders of G-20 countries met as a seizure in credit markets, stemming from losses of $964 billion on securities tied to home loans, pushed the U.S., Europe and Japan into recession.

Risk Aversion

The Nikkei 225 Stock Average dropped 0.6 percent after Japan's government today reported that gross domestic product fell at an annualized 0.4 percent pace in the three months ended Sept. 30, after sliding at a 3.7 percent rate in the previous quarter. Economists predicted 0.1 percent growth, a Bloomberg survey showed.

`The implications of the data are positive for the yen,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender. ``A weak economy will feed into risk aversion and this will strengthen the yen.''

Japan's currency may rise to 92 per dollar by year-end, he said. Volatility implied on one-month dollar-yen options climbed to 28.50 percent from 26.63 percent late in New York on Nov. 14, indicating greater exchange-rate fluctuation risks that may erode profit on carry trades.

U.S. Economy

A gauge of manufacturing in New York sank to minus 26.0 in November, the lowest since the index started in 2001, according to a Bloomberg News survey of economists. The Federal Reserve Bank of New York will release the report today. Housing starts dropped to a 780,000 annual rate in October, the fewest since at least 1959, a separate Bloomberg survey shows. The Commerce Department will release the data on Nov. 19.

In carry trades, investors purchase higher-yielding assets funded with currencies borrowed at lower rates. The yen rose 2 percent against the euro last week and advanced by 5.1 percent against the Australian dollar and 8.1 percent versus the New Zealand dollar.

Benchmark interest rates are 0.3 percent in Japan, 1 percent in the U.S., 3.25 percent in Europe, 5.25 percent in Australia and 6.5 percent in New Zealand.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.