Yen Gains as Global Economic Slump Saps Demand for High Yields

By Stanley White and Daniel Kruger

Nov. 11 (Bloomberg) -- The yen rose against the euro on speculation the world's biggest economies will contract, prompting investors to sell higher-yielding assets and pay back loans in Japan.

The yen also advanced against versus the dollar as Asian stocks extended losses on concern a recession will reduce corporate earnings. The euro fell against the dollar before data that may show investor confidence in Germany, Europe's largest economy, remained near a record low this month.

``Sentiment is in favor of further yen gains,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``A weak stock market causes a reversal in risk trades, which is supportive of the yen. The euro is vulnerable because the economic outlook points to lower interest rates in the future.''

The yen rose to 124.49 per euro at 9:22 a.m. in Tokyo from 124.95 late yesterday in New York. The yen gained to 97.78 against the dollar from 98.00. The euro bought $1.2726 from $1.2748. The yen may rise to 97.30 per dollar and 124.20 against the euro today, Ishikawa said. Trading may be less than normal as U.S. financial markets are closed today for a public holiday, he said.

Investors have been reducing carry trades, where they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.3 percent target lending rate is the lowest among major economies.

Stock Markets

The Nikkei 225 Stock Average fell 2.6 percent as watchmaker Citizen Holdings Co. cut its annual earnings target by a third. Japanese Prime Minister Taro Aso's support declined as dissatisfaction increases over his government's response to the global crisis, the Asahi newspaper said today, citing its own survey. Japan will contract 0.2 percent next year, the U.S. by 0.7 percent and the euro area 0.5 percent, the International Monetary Fund said last week.

The Group of 20 industrial and emerging nations, meeting Nov. 9 in Sao Paulo, said they're ready to act ``urgently'' to support global growth. The group called on countries to cut interest rates and raise spending to combat the threat of a global recession. The leaders of the industrial and emerging countries, due to gather Nov. 14 and 15 in Washington, will consider steps ranging from raising bank-capital standards to regulating hedge funds.

German Confidence

Gains in the euro may be curbed before the ZEW Center for European Economic Research releases its German investor confidence index today. The index of investor and analyst expectations was minus 63 in November, the same as last month, according to a Bloomberg survey. The gauge reached an all-time low of minus 63.9 in July.

European Central Bank President Jean-Claude Trichet said yesterday in Sao Paulo that receding inflation may allow central banks to further reduce interest rates.

``The euro area's economy isn't doing well and rate cuts are likely to continue,'' said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale SA, France's second- largest bank by market value. ``The euro may be sold.''

The euro may decline to $1.2600 and 123.50 yen today, he said.

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 2.86 percent yesterday from 3.005 percent on Nov. 7. The ECB benchmark is 0.39 percentage point higher than the Euribor contract yield, compared with a 12-month average of 19 basis points below the futures rate.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net