By Agnes Lovasz and Ron Harui
Nov. 10 (Bloomberg) -- The yen declined for a second day against the euro on speculation China's $586 billion stimulus package will give investors more confidence to buy higher- yielding assets using money borrowed in Japan.
The yen fell the most versus the Australian dollar and South African rand as stocks and commodities rose following China's announcement yesterday. The dollar weakened against the euro, pound and Indian rupee after the Group of 20 nations said it's ready to act ``urgently'' to prop up global growth.
``The litmus test of risk appetite in currency markets is always the movements in yen crosses,'' said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. ``Monetary authorities and governments are throwing everything they can at slowing growth and credit problems and markets have been buoyed by that.''
The yen fell to 128.16 per euro at 6:35 a.m. in New York from 124.90 in New York on Nov. 7. Against the dollar, it declined to 99.34 from 98.24. The euro rose to $1.2915 from $1.2718. The British pound advanced to $1.5813 from $1.5643.
China's stimulus plan, equivalent to almost a fifth of last year's gross domestic product, is a response to a slump in its major export markets. Japan will contract 0.2 percent next year, the U.S. by 0.7 percent and the euro area 0.5 percent, while China will expand 8.5 percent, the International Monetary Fund said last week, predicting the first simultaneous recession in the U.S., Japan and euro region in the post-World War II era.
Carry Trades
Against the South African rand, the yen declined 4.3 percent to trade at 10.0883 rand, from 9.6559. It fell 4.6 percent versus the Australian dollar to 68.38 and 3.3 percent against the New Zealand dollar to 60.03. The three currencies all weakened at least 30 percent against the yen in the past year as a credit-market collapse reduced appetite for risk.
The leaders of G-20 nations, meeting yesterday in Sao Paulo, called on countries to cut interest rates and raise spending to combat the threat of a global recession.
The yen typically falls as appetite for high-risk securities increases, as traders put on so-called carry trades. In such transactions, investors purchase higher-yielding assets in nations with low interest rates, taking the risk that currency market moves erase the profits. Japan's benchmark rate of 0.3 percent compares with 12 percent in South Africa, 5.25 percent in Australia and 6.5 percent in New Zealand.
The Japanese currency will stay close to its current levels in coming months as risk aversion returns, keeping it from falling beyond 100 per dollar, according to Mellor.
Lower Volatility
The yen also weakened as volatility implied by one-month dollar-yen options fell to 23.15 percent from 24.27 percent on Nov. 7, signaling a lower risk of exchange-rate fluctuations that can make carry trades unprofitable.
World leaders will meet in Washington on Nov. 15 to discuss their response to the credit crisis. Financial firms worldwide have disclosed $690 billion in losses and asset writedowns since the financial turmoil began last year.
Stocks rose in Europe and Asia today and U.S. index futures climbed as appetite for higher-yielding assets improved. The MSCI World Index added 1.7 percent. Europe's Dow Jones Stoxx 600 Index advanced 3.1 percent and futures on the Standard & Poor's 500 Index climbed 2.7 percent.
``Optimism over China's stimulus plan is contributing to stock market gains,'' said Takeshi Tokita, vice president of foreign-exchange sales in Tokyo at Mizuho Corporate Bank, a unit of Japan's second-largest publicly traded lender. ``This is helping to calm investor sentiment and causing the yen to weaken.''
The yen may decline to 99.50 per dollar and 128.50 against the euro today, Tokita said.
BRICs Coordinate
Brazil, Russia, India and China, the so-called BRIC nations, plan coordinated measures to increase trade and capital flows among their economies, Russian Finance Minister Alexei Kudrin said in an interview on Nov. 8 in Sao Paulo.
The Russian ruble fell 8.8 percent against the dollar this year, the Brazilian real declined 18 percent, while the Indian rupee weakened by 17 percent. The rupee climbed 0.6 percent to 47.3700 per dollar today.
Russia may be forced to accept a devalued ruble as tumbling oil prices and an exodus of capital erode the country's foreign- exchange reserves, the world's third-largest. The currency may slump as much as 30 percent in the event of a devaluation, Troika Dialog, Russia's oldest investment bank, said last week. Reserves fell 19 percent to $484.6 billion in the 12 weeks through Oct. 31.
The yen dropped versus all of the 16 most-active currencies as the MSCI Asia-Pacific Index of regional shares climbed 3.2 percent and the Nikkei 225 Stock Average rose 5.8 percent.
ECB Rate Bets
Gains in the euro may be curbed after European Central Bank President Jean-Claude Trichet told Brazil's TV Globo he can't rule out a further rate reduction.
``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.''
Traders increased bets the ECB will reduce its 3.25 percent rate in the first quarter of next year. The implied yield on Euribor interest-rate futures contracts expiring in March fell to 2.990 percent today 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, Globo TV reported yesterday, citing an interview.
Technical charts that predict currency movements indicate the dollar may rise this week to so-called resistance at the Nov. 4 high of 100.55 yen, according to Shinko Securities Co.
The greenback is poised to gain after breaking above its 20-day moving average, said Kengo Suzuki, currency strategist at Shinko Securities in Tokyo. Resistance is where sell orders may be clustered.
The dollar may also rise as its daily stochastic and moving average convergence/divergence charts are showing buy signals, Suzuki said. Should the U.S. currency climb above 100.55 yen, it may then move to its Oct. 14 high of 103.07, he said.
To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomerg.net; Agnes Lovasz in London at alovasz@bloomberg.net
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