Yen Gains on Speculation Global Recession to Curb Carry Trades

By Stanley White

Nov. 27 (Bloomberg) -- The yen rose for a third day against the euro and advanced versus the dollar on speculation a global recession will spur investors to pare holdings of higher- yielding assets funded in Japan.

The yen strengthened versus the Australian dollar before reports that may show money-supply growth and inflation are slowing in Europe, giving the European Central Bank more scope to cut interest rates. Data yesterday showed U.S. consumer spending, durable-goods orders and new-home sales fell last month as the global financial crisis damped consumption.

“The market is focused on how much the economic outlook will deteriorate in Europe and the U.S.,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co., a unit of Japan’s largest brokerage. “An economic downturn will push up the yen, because traders will be reluctant to take on risk.”

The yen rose to 122.99 per euro as of 9:57 a.m. in Tokyo from 123.24 late yesterday in New York. It gained to 95.41 per dollar from 95.67. The euro was little changed at $1.2895 from $1.2880. The yen may advance to 121.90 versus the euro and 94.80 against the yen today, Amikura said.

The Indian rupee may decline on speculation overseas investors will shun the country’s assets after a terrorist attack targeting foreigners in Mumbai, India’s financial hub, left as many as 80 people dead and 240 injured. The rupee traded at 49.4350 per dollar at yesterday’s close in Mumbai.

U.S. Holiday

The yen climbed to 62.17 against the Australian dollar from 62.38 yesterday in New York. It was at 146.42 to the British pound from 146.61. 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 currency market moves can erase those profits. Japan’s benchmark rate of 0.3 percent is the lowest among industrialized economies.

Currency moves may be exaggerated today as U.S. financial markets are closed for the Thanksgiving Day holiday, according to Mitsuru Sahara, senior currency sales manager in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest lender by assets.

“I expect the poor economic outlook to push up the yen,” Sahara said. “Terrorism in India is also somewhat unsettling. We cannot rule out big swings in currencies today because volume will be very light as the U.S. markets are out of the action.”

The yen may move between 94.50 and 96 versus the dollar today, he said.

Money Supply

M3 money supply, which the ECB uses as a gauge of future inflation, slowed to an 8.1 percent gain in October from an 8.6 percent increase the previous month, according to a Bloomberg News survey of economists before the data is released today.

Consumer prices in the 15 countries that share the euro rose 2.4 percent in November, slower than a 3.2 percent gain the previous month, a separate report tomorrow may show.

U.S. consumer spending, the biggest contributor to the economy, fell 1 percent last month, after dropping 0.3 percent in September, the Commerce Department reported yesterday. New- home sales in the U.S. fell to an annual pace of 433,000, the lowest level in 17 years. Orders for long-lasting goods declined 6.2 percent, following a 0.2 percent decrease in September.

The Federal Reserve committed up to $800 billion on Nov. 25 in new funding to thaw credit flow for homebuyers, consumers and small businesses.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, rose 0.8 percent to 85.667 yesterday. The index climbed to 88.463 on Nov. 21, the highest level since April 2006.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net.