Yen Gains as Deepening U.S. Recession Curbs Carry Trade Demand

By Stanley White and Ron Harui

Nov. 25 (Bloomberg) -- The yen rose before U.S. reports today that economists forecast will show the recession in the world’s largest economy is deepening, prompting investors to cut holdings of higher-yielding assets financed in Japan.

The currency snapped two days of losses against the dollar and the euro on speculation the government bailout of Citigroup Inc. won’t prevent a protracted slowdown, reducing demand for so- called carry trades. The third-quarter contraction in the U.S. economy was likely worse than previously estimated, the Commerce Department may say today, according to a Bloomberg News survey.

“There is much skepticism about how long the Citigroup rescue-inspired confidence will last and, despite the amped up government measures, the global economy is headed for recession,” said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. “Worries about a deep and prolonged global recession will likely continue to support the yen over coming months.”

The yen advanced to 96.88 against the dollar as of 9:30 a.m. in Tokyo from 97.34 late in New York yesterday, when it dropped 1.4 percent. It strengthened to 124.94 per euro from 126.08. The euro fell to $1.2898 from $1.2953.

Against the yen, Australia’s dollar lost 1.4 percent to 62.81 from 63.66 late in New York yesterday. New Zealand’s dollar fell 1 percent to 52.88 yen and Norway’s krone dropped 0.8 percent to 13.9628 yen.

Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July to September, more than the government’s earlier estimate of 0.3 percent, the survey shows. The report will be released at 8:30 a.m. in Washington.

Consumer Confidence

The Conference Board’s consumer confidence index remained at 38 in November, matching October’s reading that was the lowest since monthly records began in 1967, a separate Bloomberg survey shows. The data are due at 10 a.m. in New York.

Japan’s benchmark interest rate of 0.3 percent compares with 5.25 percent in Australia, 6.5 percent in New Zealand and 3.25 percent in Europe.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.

Citigroup received a U.S. government rescue package that shields the bank from losses on toxic assets and injects $20 billion of capital.

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