Yen Gains as Global Stock Slump Saps Demand for High Yields

By Stanley White and Ron Harui

Nov. 11 (Bloomberg) -- The yen rose against the euro on speculation a slump in global stocks prompted investors to sell higher-yielding assets and pay back loans in Japan.

Japan's currency gained more than 3 percent versus the Australian and New Zealand dollars from late yesterday in Asia as so-called carry trades were reduced. The euro fell against the dollar before a report economists say will show investor confidence in Germany was near a record low, supporting the case for interest-rate cuts by the European Central Bank.

``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 7:40 a.m. in London from 124.95 late yesterday in New York. The yen was little changed at 97.77 against the dollar. The euro slipped to $1.2722 from $1.2748. The pound was quoted at $1.5635 from $1.5604. The yen may rise to 97.30 per dollar today, Ishikawa said.

Trading volumes may be lower than normal as U.S. financial markets are closed today for a public holiday, he said.

Against the Australian dollar, the yen gained to 65.43 from 68.96 late yesterday in Asia and it climbed to 57.24 versus the New Zealand dollar from 59.83.

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.

Asian Currencies

The Malaysian ringgit dropped 1 percent to 3.5806 per dollar and Indonesia's rupiah fell 2 percent to 11,329 as concern the global economy is headed for a recession prompted investors to seek safer bets than emerging-market assets. The MSCI Asia Pacific Index of shares declined 3.2 percent.

Japan's Nikkei 225 Stock Average dropped 3 percent as Citizen Holdings Co., the world's biggest maker of mechanical watches, cut its annual earnings target by a third. More than half of the 922 Japanese companies that reported first-half earnings through Nov. 10 reduced full-year profit targets, according to a report by Shinko Research Institute Co.

Japan's economy 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 forecast last week.

G-20 Meetings

Leaders of the Group of 20 industrial and emerging nations, due to gather Nov. 14 and Nov. 15 in Washington, will consider steps ranging from raising bank-capital standards to regulating hedge funds to address a global financial crisis. Member nations' finance ministers called for interest-rate cuts and increased government spending after meeting two days ago in Sao Paulo.

Against the pound, the euro declined from yesterday's record high of 82.09 pence to 81.41.

The ZEW Center for European Economic Research will release its German investor confidence index at 11 a.m. today in Mannheim. The index of investor and analyst expectations was minus 63 in November, the same as last month, according to a Bloomberg News 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.

Weaker Euro

``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.

Any gains in the pound may be limited after the Royal Institution of Chartered Surveyors said U.K. home sales declined to the lowest level in at least three decades.

The Bank of England may cut its 3 percent benchmark interest rate further to help support the economy, futures show. The IMF report showed gross domestic product in the U.K. next year will shrink 1.3 percent, a steeper decline than the 0.1 percent contraction forecast in October.

Rate Cuts

``The euro and sterling are likely to remain weak against the dollar in coming months due to the weaker European growth outlook and with the ECB and BOE expected to cut rates sharply lower with GDP plunging,'' wrote John Praveen, Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which manages $602 billion, in a monthly research report sent to Bloomberg News yesterday.

The implied yield on the December short-sterling futures contract fell to 3.525 percent yesterday, from 3.56 percent on Nov. 7, indicating traders increased their bets on more rate reductions.

The dollar may fall to 96.85 yen as soon as this week, according to an Elliott Wave chart that predicts price movements, said Andrew Chaveriat, a technical analyst at BNP Paribas SA in New York.

The chart shows the U.S. currency has begun a third wave, where the dollar may decline against the yen, wrote Chaveriat in a research report yesterday. Support at 96.85 yen is a 38.2 percent Fibonacci retracement of the dollar's climb from the Oct. 24 low of 90.93 yen to the Nov. 4 high of 100.55 yen. Support is where buy orders may be clustered.

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