Yen Near Highest This Week as Stock Decline Crimps Carry Trades

By Ron Harui and Stanley White

Nov. 12 (Bloomberg) -- The yen traded near the highest this week against the dollar as weakness in global equities encouraged investors to sell higher-yielding assets and pay back low-cost loans in Japan's currency.

The yen also advanced for a third day from the Asian close versus the Australian and New Zealand dollars, two favorites of so-called carry trades, as prices of the commodities the Southern Hemisphere countries export fell. Confidence in higher- yielding currencies weakened after speculation increased that General Motors Corp. is approaching bankruptcy and Standard & Poor's cut South Africa's ratings outlook.

``Currency markets are simply following stocks, so declines in equities are a reason to push up the yen,'' said Takeshi Iba, vice president of foreign exchange in Tokyo at BBH Investment Services Inc., a unit of Brown Brothers Harriman. ``There's negative news from Oceania and South Africa, so I see the dollar rebounding against these currencies.''

The yen traded at 97.55 against the dollar as of 9:54 a.m. in Tokyo from 97.65 late in New York yesterday and reached 97.16. It traded at 122.31 per euro from 122.27. It reached 121.23, the highest since Oct. 28. Japan's currency may strengthen to 97 versus the greenback today, Iba said.

The euro traded at $1.2538 from $1.2522. The British pound bought $1.5400 from $1.5384. The dollar was at 10.3512 South African rand from 10.3300.

Against the Australian dollar, the yen advanced 2.1 percent to 64.07 from 65.35 late yesterday in Asia and climbed 2.2 percent to 55.71 versus the New Zealand dollar from 56.96. Japan's currency gained to 9.3999 per rand from 9.4539.

Carry Trades

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 compares with 5.25 percent in Australia, 6.5 percent in New Zealand and 12 percent in South Africa.

Volatility implied by one-month euro-yen options rose to 36.32 percent from 35.96 percent yesterday, indicating a greater exchange-rate fluctuation risk that may erode profit on carry trades.

Standard & Poor's cut its outlook on South Africa's BBB+ credit rating to ``negative'' from ``stable.'' The rand has fallen 33 percent against the dollar this year, adding to pressure on prices and making it difficult for the central bank to lower interest rates, even as economic growth slows, S&P said.

The yen strengthened against all of the 16 most-active currencies as the Nikkei 225 Stock Average slid 2.5 percent after the Standard & Poor's 500 Index dropped 2.2 percent. GM tumbled to the lowest price since 1943 on speculation the company will enter bankruptcy as it waits to learn whether the auto industry will win a new round of government loans.

`Heavy Storm'

Japan's currency has advanced 12 percent against the dollar and 33 percent versus the euro in the past three months as the deepening global slowdown encouraged Japanese investors to sell high-yielding assets and bring money home.

``When you have a heavy storm, it won't clear any time soon,'' said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut. ``I still like the yen.''

Leaders of the Group of 20 industrial and emerging nations, due to gather Nov. 14-15 in Washington, will consider steps ranging from raising bank-capital standards to regulating hedge funds to address the financial crisis.

The ruble declined 1 percent to 30.7028 versus the dollar- euro basket that the Russian central bank uses to manage the ruble's fluctuation. Bank Rossii widened its range yesterday on the ruble against a basket of dollars and euros by 30 kopeks (1 cent) to increase the currency's ``flexibility'' and lifted its benchmark refinancing rate to 12 percent from 11 percent to arrest outflows, according to separate statements after Russia's stock market closed.

Russia's currency depreciated 1.9 percent to 27.5743 against the dollar and 0.1 percent to 34.5289 versus the euro yesterday. The ruble basket consists of about 55 percent dollars and 45 percent euros.

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