By Ye Xie and Daniel Kruger
Oct. 31 (Bloomberg) -- The yen and the dollar rose against the euro and posted record monthly gains as signs of a global recession led investors to seek safety.
The euro also weakened as inflation in the 15 nations that share the currency slowed to the lowest since January, making room for the European Central Bank to lower borrowing costs. The Bank of Japan cut its target lending rate to 0.3 percent.
``The yen should remain relatively firm on global economic worries,'' said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. ``The convergence of interest rates should play in favor of the dollar.''
The yen climbed 1.5 percent to 125.53 per euro at 4:01 p.m. in New York, from 127.31 yesterday. The yen traded at 98.51 against the dollar, compared with 98.61. The dollar rose 1.4 percent to $1.2739 versus the euro from $1.2915.
Japan's currency appreciated 19 percent against the euro in October on speculation the global economic slump will encourage investors to sell higher-yielding assets and pay back low-cost loans in the yen. It was the currency's biggest monthly gain since the euro's introduction in 1999.
The dollar increased a record 10.6 percent this month against the euro and dropped 7.2 percent against the yen, the biggest decline since 1998, when hedge fund Long-Term Capital Management LP collapsed.
Honda Earnings
The strength in the yen has eroded Japanese exporters' overseas income. Honda Motor Co., Japan's second-largest automaker, cut its operating profit forecast for the year ended in March 2009 by 13 percent to 550 billion yen ($5.6 billion) this week. Japan's Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo that abrupt increases in currency volatility are ``undesirable.''
The yen increased 3 percent to 65.29 against the Australian dollar today and 1.7 percent to 58.20 versus the New Zealand currency on speculation carry trades will unwind. The Aussie dropped 22 percent against the yen this month, while the kiwi, as New Zealand's currency is known, decreased 19 percent. The target lending rates are 6 percent in Australia and 6.5 percent in New Zealand.
Japanese individual investors purchased 632 billion yen ($6.38 billion) this week, the fourth consecutive week of net buying, Junya Tanase, a currency strategist at JPMorgan Chase & Co. in Tokyo, wrote in a research note. The outstanding bets on a decline in the yen dropped to 1.1 trillion yen, the smallest since October 2006, according to the report.
Currency Volatility
Volatility implied by dollar-yen options expiring in one month, a measure of expectations for future currency moves, rose to 31.63 percent from 31.16 percent yesterday. It reached 41.79 percent on Oct. 24, the highest since Bloomberg began compiling data in December 1995. Higher volatility can discourage carry trades by making profits harder to predict.
``I like the yen,'' said Chirag Gandhi, a portfolio manager of a $2.5 billion global fixed-income fund for the state of Wisconsin in Madison. ``The unwinding of structural carry trades and lower interest-rate spreads between Japan and other countries are supporting the yen.''
The euro weakened as the European Union statistics office reported that inflation in the countries sharing the currency eased to 3.2 percent in October, encouraging speculation that the ECB will cut interest rates for the second time in less than a month in response to the financial and economic crisis.
Coordinated Cuts
The central bank participated in a coordinated interest- rate reduction by global central banks on Oct. 8 to prevent the international financial system from collapsing, reducing its benchmark rate by a half-percentage point to 3.75 percent. Policy makers will probably cut the region's main refinancing rate to 3.25 percent when they next meet Nov. 6, according to the median forecast of 50 economists surveyed by Bloomberg News.
The pound weakened 2.2 percent to $1.6087 after London- based market researcher GfK NOP said U.K. consumer confidence in October fell to the lowest since at least 1974. Sterling has dropped 10 percent this month, the biggest decline since investor George Soros drove the currency out of Europe's system of linked exchange rates in 1992.
The Bank of England will lower its main rate by a half- percentage point to 4 percent when it announces its next decision on Nov. 6, according to the median forecast of 30 economists surveyed by Bloomberg News.
Currencies of developing countries tumbled this month on concern a global economic slump will sap demand for emerging- market assets.
South Africa's rand dropped 15 percent to 9.7725 per dollar, the most since 1985. Mexico's peso lost 15 percent to 12.8890 per dollar, the biggest decrease since 1994, when Mexico abandoned its peg to the dollar and devalued the currency. Russia's ruble weakened 5.2 percent to 27.0633.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
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