By Ron Harui and Candice Zachariahs
Nov. 3 (Bloomberg) -- The yen fell against the dollar and the euro as a rally in Asian stocks encouraged investors to step up purchases of higher-yielding assets financed with the Japanese currency.
The yen also weakened versus Australia's dollar on expectations the Reserve Bank of Australia will cut interest rates tomorrow, helping sustain economic growth. It slid against South Korea's won and India's rupee after Korea announced a $10.8 billion stimulus package and India's central bank lowered borrowing costs for the second time in two weeks. The dollar declined against the euro before reports this week that economists forecast will show the world's largest economy slowed.
``Risk sentiment seems to be improving because of strong hopes for central banks' rate reductions,'' said Takashi Yamamoto, chief trader at Mitsubishi UFJ Trust & Banking Corp. in Singapore. ``The yen is being sold.''
Japan's currency declined 0.4 percent to 98.89 against the dollar as of 8:23 a.m. in London from 98.46 late in New York on Oct. 31. It dropped 1 percent to 126.50 per euro. The dollar weakened to $1.2792 per euro from $1.2726 and dropped to $1.6264 versus the pound from $1.6076.
The yen has appreciated 9.1 percent versus the greenback since Sept. 12, the last trading day before Lehman Brothers Holdings Inc. filed for the world's biggest bankruptcy. The remainder of the world's 16 most-active currencies declined as frozen credit markets and a stocks rout that wiped out more than $13 trillion of market value fueled risk aversion. It may fall to 100 versus the dollar today, Yamamoto said.
`Riskier Trades'
The Japanese currency fell 2 percent to 67.05 against the Australian dollar from 65.74 in New York on Oct. 31. It reached 55.14 on Oct. 24, the strongest since Australia's currency started trading freely in 1983. The yen dropped 3 percent to 12.71 won and 2.2 percent to 2.035 versus the Indian rupee.
The won rose 2.3 percent versus the greenback to 1,262, after Finance Minister Kang Man Soo said today the government plans to spend an extra 14 trillion won ($10.8 billion) next year to help the economy.
``The riskier trades are a little bit better bid,'' said Gerrard Katz, head of foreign-exchange trading at Standard Chartered Plc in Hong Kong. ``Some of the crosses are performing well'' against the yen, he said.
The biggest rout in Asian currencies since the regional financial crisis of 1997 is tempting investors, drawn by the world's fastest economic growth and $4 trillion of reserves.
Growth, Reserves
Franklin Templeton Investments, which manages about $500 billion, favors the Malaysian ringgit and China's yuan. Sydbank A/S, Denmark's third-largest bank, is buying South Korean won, Indonesian rupiah and Indian rupee. Goldman Sachs Group Inc. said last week that the won, Asia's worst-performer this year after falling 26 percent against the dollar, may gain 10 percent in the next six months.
``We have taken advantage of the recent broad-based weakness to increase our exposure to some Asian currencies,'' said Michael Hasenstab, manager of the $9.6 billion Templeton Global Bond Fund in San Mateo, California. ``The differential in growth between Asia and other regions should continue to attract capital, and growth may further benefit from initiatives of local governments that have significant resources to bolster domestic demand.''
The MSCI Asia-Pacific excluding Japan Index, a benchmark for regional shares, climbed 4.9 percent. Trading volumes in the foreign-exchange market may be lower than normal today because of a public holiday in Japan.
Rate Cuts
Economists forecast the Reserve Bank of Australia will cut its benchmark interest rate by a half-percentage point to 5.5 percent tomorrow, after policy makers in the U.S., Japan and China announced reductions last week.
The Federal Reserve lowered its target rate to 1 percent, matching a half-century low, after a government report showed the U.S. economy contracted by the most since 2001 in the third quarter. Futures on the Chicago Board of Trade indicate a 55 percent probability the Fed will reduce the target rate to 0.5 percent at its Dec. 16 meeting. The odds a week ago were zero.
The European Central Bank and the Bank of England will reduce their benchmarks by a half-percentage point to 3.25 percent and 4 percent, respectively, at policy meetings on Nov. 6, according to separate Bloomberg surveys of economists.
Less Volatility
The yen also weakened after volatility implied by one-month euro options against Japan's currency declined to 43.19 percent from 43.93 percent on Oct. 31, indicating a reduced risk of exchange-rate fluctuations that may make carry trades unprofitable. Volatility reached 49.62 percent on Oct. 27, the highest level since the common European currency's debut in 1999.
In carry trades, investors get funds from countries with low-borrowing costs such as Japan, where the benchmark interest rate is 0.3 percent, and invest the money in overseas markets where returns are higher.
The dollar fell for the first time in three days against the euro on speculation that growth in the world's largest economy will slow further, supporting the case for the Federal Reserve to cut interest rates. A report today is forecast to show U.S. manufacturing last month dropped to the lowest level since October 2001.
``I would expect another week of poor economic news that will reinforce the headwinds facing the global economy,'' said John Horner, a currency strategist at Deutsche Bank AG in Sydney. ``This is something that should weigh on the dollar'' against the yen in particular, he said.
The Institute for Supply Management's factory index, scheduled for release at 10 a.m. in New York, declined to 41.5 in October from 43.5 the previous month, according to economists surveyed by Bloomberg News. A reading of less than 50 signals contraction. A Labor Department report on Nov. 7 will probably show payrolls fell for a 10th straight month in October, a separate survey showed.
U.S. Presidential Election
The foreign-exchange markets may be ``distracted'' by the U.S. presidential election on Nov. 4, according to UBS AG, the world's second-largest currency trader.
Democratic presidential nominee Barack Obama holds a 54 percent to 43 percent lead among likely voters over Republican candidate John McCain in the presidential campaign, according to a Washington Post-ABC News tracking poll.
``With the result largely priced in, we are not expecting a significant impact on the currency markets,'' wrote Geoff Kendrick, a senior currency strategist in London at UBS, in a research note today.
To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
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