Yen Heads for Third Weekly Advance on U.S. Recession Concern

By Ron Harui and Stanley White

Nov. 21 (Bloomberg) -- The yen headed for a third weekly gain against the dollar and the euro on speculation slides in global stocks will prompt investors to sell higher-yielding assets and pay back loans in Japan.

The yen was poised for a second weekly advance versus the New Zealand dollar and a third against the British pound as U.S. lawmakers held off taking action on a bailout requested by the nation's automakers, spurring a reduction in so-called carry trades. A surge in U.S. jobless claims and a drop in manufacturing also helped bolster Japan's currency.

``Money is flowing back to funding currencies like the yen,'' said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``It's difficult to change the trend of stock declines pushing up the yen. Until we reach a conclusion on U.S. automakers, risk is off the table.''

The yen traded at 94.16 per dollar as of 10:14 a.m. in Tokyo from 93.69 late yesterday in New York, on course for a 3.2 percent gain this week. Japan's currency was at 117.13 per euro from 116.68 yesterday and 122.39 on Nov. 14. The euro bought $1.2438, headed for a 1.4 percent weekly decline.

South Korea's won weakened the most among the 16 most- active currencies versus the yen this week, falling 10.4 percent to 16.10899. Mexico's peso was the second-worst performer, dropping 9.9 percent to 6.742 yen.

The Nikkei 225 Stock Average fell 2.9 percent. The Standard & Poor's 500 Index slid 6.7 percent yesterday. Democratic congressional leaders said yesterday they will delay action at least until next month on government support for General Motors Corp., Ford Motor Co. and Chrysler LLC as the three companies haven't yet made a case for the help.

`Global Economy Slows'

First-time claims for U.S. unemployment insurance unexpectedly rose last week to the highest level since 1992, the Labor Department reported yesterday. Manufacturing in the Philadelphia region shrank in November at the fastest pace in 18 years, the Federal Reserve Bank of Philadelphia said.

Morgan Stanley forecasts the yen will advance to 85 against the dollar and 94 per euro and the dollar will rise to $1.10 per euro by the end of June.

``As the global economy slows, the U.S. dollar and the yen will continue to strengthen against virtually every other currency in the world,'' wrote London-based foreign exchange strategists Stephen Jen and Spyros Andreopoulos in a research note yesterday. ``Risky assets will likely remain under pressure as long as the end of the global recession is not in sight.''

Implied volatility on one-month dollar-yen options rose to 26.22 percent from 25.67 percent yesterday, indicating a greater risk of exchange-rate fluctuations that may erode profit on carry trades.

RBA Intervention

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.

Japan's benchmark interest rate of 0.3 percent compares with 6.5 percent in New Zealand, 3 percent in the U.K., 8.25 percent in Mexico and 4 percent in South Korea.

The Australian dollar pared its weekly decline against the yen today after the Reserve Bank of Australia intervened and bought its own currency for at least the fifth time in four weeks. The central bank bought a record A$3.15 billion ($1.9 billion) in the market in October as the currency touched 60.10 U.S. cents, the lowest since 2003. It recently traded at 61.10, from 64.81 at the end of last week.

Any gains in the U.S. dollar may be limited by speculation the Federal Reserve will lower its 1 percent target for the overnight lending rate as a recession causes prices to fall.

Richmond Fed President Jeffrey Lacker speaks about the economy at 8:15 a.m. in Bethesda, Maryland today. Philadelphia Fed President Charles Plosser and Chicago Fed President Charles Evans also speak later today.

Treasuries Dropped

Yields on two-, five- and 10-year notes and 30-year Treasuries dropped yesterday to the least since the government began regular issuance of the securities. The U.S. consumer price index fell last month by the most since records began in 1947, data on Nov. 19 showed.

The Fed's record injections of liquidity to stabilize the financial system have driven the overnight lending rate between banks to less than half the 1 percent target set by officials last month. The gap is shifting investors' focus toward the amount of money in the banking system as a better gauge of Fed intentions.

``I don't think there's a way of avoiding the fact that extremely low interest rates and excess liquidity are negative for the dollar,'' said Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney. ``The Treasury market is clearly showing people don't expect much inflation. This is not going away.''

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