Yen Gains on Speculation Investors Sold High-Yielding Assets

By Stanley White and Ron Harui

Nov. 20 (Bloomberg) -- The yen rose for a second day against the dollar and the euro on speculation a plunge in global stocks prompted investors to sell higher-yielding assets and pay back low-cost loans from Japan.

The yen extended gains versus Brazil's real and South Africa's rand on bets a deepening global slump will deter so- called carry trades. South Korea's won tumbled to the lowest in more than 10 years as investors shunned emerging-market assets.

``All the atmospherics suggest that the economic impact from the financial dislocations in recent months is quite intense and quite widespread,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group in Sydney. ``Risk dynamics are still at work. It's quite clear the yen is going to outperform.''

The yen rose to 95.31 against the dollar as of 7:32 a.m. in London from 95.73 late yesterday in New York. It was at 119.31 versus the euro from 119.55. The dollar was at $1.2519 per euro from $1.2489. The currency may advance to 94.50 versus the dollar and 117.65 per euro during the next couple of days, Morriss said.

The Korean won fell as low as 1,523 per dollar, the weakest level since 1998, as investors stepped up sales of the nation's shares after U.S. stocks sank to a five-year low yesterday. The won is down 38 percent this year, the worst performer of the 10 most-traded Asian currencies excluding the yen.

Won Slump

``There's talk South Korea's central bank has been intervening today to sell the dollar and buy the won,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``There's a possibility other Asian central banks may also sell the dollar to temper excessive declines in their currencies, leading to downward pressure on the greenback.''

Central banks intervene in foreign-exchange markets by arranging purchases and sales of currencies.

In a carry trade, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits. Japan's 0.3 percent target lending rate compares with 13.75 percent in Brazil, 12 percent in South Africa and 4 percent in South Korea.

The MSCI Asia-Pacific Index of regional shares fell 5 percent after Standard & Poor's 500 Index dropped 6.1 percent yesterday to its lowest close since 2003.

`Rocky Road'

``It's going to be a very rocky road,'' said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, in a Bloomberg Television interview. ``The dollar-yen is closing down below some pretty significant short-term support at 96 yen. That really opens up the path for a test down to the previous lows around 94.50'' reached last week, he said.

Japan's currency reached a 13-year high of 90.93 per dollar last month, threatening exporters' earnings.

Isuzu Motors Ltd., Japan's largest maker of light-duty trucks, said today it will cut temporary and part-time workers and reduce output from next month as demand falls.

Tokyo-based Isuzu cut its fiscal full-year net income forecast 53 percent on Nov. 5 to 40 billion yen ($420 million) on lower global demand. Isuzu's sales in Thailand, its biggest overseas market, plunged 30 percent in October, the fifth straight monthly decline.

Exports, the main engine of Japan's economy in the past six years, fell 7.7 percent in October from a year earlier, the biggest drop since December 2001, the Finance Ministry said today in Tokyo, as a stronger yen and the global financial crisis stifled overseas demand.

`Upward Pressure'

``Corporate sentiment may worsen and investors' concern over losses on their stock holdings may increase, putting upward pressure on the yen,'' said Masafumi Yamamoto, head of foreign- exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan currency trader.

Federal Reserve policy makers predicted last month the U.S. economy will contract through the middle of 2009, with some prepared to cut interest rates further in response, according to a record of their Oct. 28-29 meeting. The Fed lowered its benchmark rate to 1 percent, matching a half-century low, to avert the worst recession since World War II.

The British pound traded at $1.4940 from $1.4952 and declined to 83.74 pence per euro from 83.55 on speculation the Bank of England will cut rates in the face of a recession.

U.K. retail sales fell 0.9 percent in October after a 0.4 percent decline in the previous month, according to a Bloomberg News survey. The Office for National Statistics will release the data at 9:30 a.m. in London. BOE policy makers are prepared to lower their benchmark rate from the current target of 3 percent, minutes of this month's BOE meeting showed yesterday.

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