By Ron Harui and Stanley White
Nov. 10 (Bloomberg) -- The yen declined for a second day against the euro and the dollar on speculation China's $586 billion stimulus package will give investors confidence to buy higher-yielding assets using money borrowed in Japan.
The yen fell the most against the South African rand and Australia's dollar on speculation support for China's economy, the world's fourth largest, may help avert a global recession and improve traders' appetite for risk. The Group of 20 nations is ready to act ``urgently'' and urged governments to lower interest rates and raise spending at a meeting yesterday in Sao Paulo.
``China and the tone of the G-20 meeting are clearly going to provide some support to the economic outlook,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``This would reduce risk aversion. The yen looks weak overall.''
The yen fell to 127.52 per euro at 10:15 a.m. in Tokyo from 124.90 late in New York on Nov. 7. Against the dollar, it declined to 99.10 from 98.24. The euro rose to $1.2867 from $1.2718. The pound advanced to $1.5864 from $1.5643. The yen may decline to 130 versus the euro this week, Morriss said.
Against the South African rand, the yen declined 3.8 percent to 10.0350 from 9.6559. It also fell 3 percent versus the Australian dollar to 68.29 and 2.3 percent against the New Zealand dollar to 59.44.
In carry trades, purchases of higher-yielding assets are funded in nations with lower interest rates, earning the spread between the two. The risk is that currency market moves erase those profits. Japan's benchmark rate of 0.3 percent compares with 3 percent in the U.K., 12 percent in South Africa, 5.25 percent in Australia and 6.5 percent in New Zealand.
China Stimulus
The yen also weakened as volatility implied by one-month dollar-yen options fell to 23.75 percent from 24.27 percent on Nov. 7, signaling a reduced risk of exchange-rate fluctuations that make carry trades unprofitable. Volatility reached 41.79 percent on Oct. 24, the highest since Bloomberg began compiling the data in December 1995.
China's stimulus plan, equivalent to almost a fifth of last year's gross domestic product, will go toward low-rent housing and infrastructure, the Beijing-based State Council said yesterday on its Web site. The government will also grant tax breaks to boost corporate spending.
World leaders will meet in Washington on Nov. 15 to discuss their response to a global economic crisis sparked by losses on mortgage derivatives and a seizure in credit markets.
``There's a chance emerging-market economies like China, India and Brazil could take the lead in responding to the financial crisis,'' Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader, wrote in a research note today. ``There's a risk that stocks gain and the yen weakens should these steps improve market sentiment.''
ECB's Trichet
The yen dropped versus all of the 16 most-active currencies as the MSCI Asia-Pacific Index of regional shares climbed 2.3 percent and the Nikkei 225 Stock Average rose 4.9 percent.
Gains in the euro may be limited after European Central Bank President Jean Claude-Trichet said in an interview with Brazilian broadcaster Globo TV that he can't rule out a further reduction in interest rates next month.
Central banks around the world are lowering borrowing costs to stave off the worst of the banking crisis. The ECB cut its main refinancing rate by a half-percentage point on Nov. 6 to 3.25 percent. Policy makers in the U.K., Switzerland, and the Czech Republic trimmed their benchmark rates on the same day.
``There's talk of more ECB rate cuts, given the pessimistic outlook on Europe's economies,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The medium- to long-term downtrend for the euro is likely to persist.''
ECB Rate Bets
Traders increased bets the ECB will reduce rates in the first quarter of next year. The implied yield on Euribor interest-rate futures contracts expiring in March fell to 2.995 percent, from 3.005 percent on Nov. 7.
``In December, at our next meeting'' the ECB will have new projections on economic growth and inflation and ``we do not exclude to decrease rates,'' Trichet said, Brazilian broadcaster Globo TV reported yesterday, citing an interview.
To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomerg.net; Stanley White in Tokyo at swhite28@bloomberg.net
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