Yen Rises Before G-20 Leaders Meet as Global Recession Looms

By Stanley White and Agnes Lovasz

Nov. 14 (Bloomberg) -- The yen rose, heading for weekly gains against the dollar and the euro, as signs of a deepening global economic slump prompted investors to pare holdings of higher-yielding assets funded in Japan.

Japan's currency also climbed this week against the Australian and New Zealand dollars on speculation a Group of 20 nations summit starting today will fail to reach a consensus on resolving the credit crisis. The euro headed for a weekly drop before a government report that may show a second quarter of contraction in the 15 nations sharing the currency.

``This is a difficult environment for risky assets so there's still upside for the yen in coming weeks,'' said MarcusHettinger, a currency strategist in Zurich at Credit Suisse Group. ``The yen is still undervalued. It is being supported by expectations that interest rates will come down globally and in Japan there is less scope for lower interest rates because they are already very low.''

The yen strengthened to 97.03 per dollar as of 8:56 a.m. in London, from 97.68 yesterday in New York. Against the euro, it climbed to 123.27 from 124.78. The euro rose to $1.2705 from $1.2769. The pound was at $1.4884 from $1.4841. The yen may rise to 95 against the dollar and 119 versus the euro by yearend, Hettinger predicted.

The yen typically rises when demand falls for so-called carry trades, where investors borrow in currencies with low interest rates and buy assets in nations with higher rates. Benchmark rates are 0.3 percent in Japan, 1 percent in the U.S., 5.25 percent in Australia and 6.5 percent in New Zealand.

Japan's currency gained to 63.35 yen per Australian dollar from 65.07 yesterday. It also advanced to 54.43 yen versus the New Zealand dollar from 55.81.

Weekly Performance

The yen rose 1.4 percent versus the dollar this week, its biggest gain since Oct. 24. It advanced 1.5 percent against the euro, 4.3 percent versus the Australian dollar and 6.3 percent versus the New Zealand dollar this week.

U.S. President George W. Bush yesterday urged leaders of the world's biggest economies not to abandon free-market capitalism following the seizure in credit markets. G-20 leaders including Australian Prime Minister Kevin Rudd and French President Nicolas Sarkozy have used the crisis to demand greater government control of markets and to attack the U.S. for failing to rein in investors and speculators.

Leaders of G-20 countries gather in Washington to debate proposals ranging from curbing executive pay and restraining hedge funds to raising capital requirements for banks after financial institutions worldwide lost $958 billion on securities tied to U.S. mortgages.

Volatility

Volatility implied by dollar-yen options expiring in one month was last at 23.11 percent, from an almost two-week high of 28.55 percent reached yesterday. Gains in volatility, a measure of expectations for future currency moves, may discourage carry trades as it makes profits harder to predict.

``No one is betting on volatility going down,'' said Shinichi Takasaka, manager of foreign exchange and financial products trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed bank. ``I don't see any practical plan coming out of the G-20. That's part of the reason why the yen is rising.''

The yen was also buoyed on speculation its 2.7 percent slide against the dollar and 4.8 percent tumble against the euro yesterday was excessive. U.S. stocks rallied the most in two weeks, sparking the currency's decline.

``We had such a big move yesterday, Japanese exporters are likely to buy the yen on the cheap,'' said Osao Iizuka, head of foreign-exchange trading at Sumitomo Trust & Banking Co. in Tokyo. ``People are also eyeing the G-20 meeting.''

Lower Rates

The euro fell 0.6 percent this week against the yen, while the pound slid 5 percent versus the greenback on growing evidence policy makers in Europe and the U.K. will lower borrowing costs.

Gross domestic product in the 15 euro nations shrank 0.2 percent in the third quarter after contracting by the same amount in the previous three-month period, according to a Bloomberg News survey. Two consecutive quarters of contraction would mark the first recession since the single currency was introduced in 1999. The European Union's statistics office will release the data at 11 a.m. in Luxembourg.

Germany, Europe's largest economy, entered a recession in the third quarter, data showed yesterday. Japan's gross domestic product was unchanged in the three months ended Sept. 30, according to the median estimate of economists surveyed by Bloomberg News before the government report Nov. 17.

The Bank of England is prepared to cut rates from 3 percent after predicting U.K. gross domestic product will contract by an annual 1.8 percent in the first quarter, Governor Mervyn King said on Nov. 12.

``European GDP will confirm the extent of the damage,'' Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, France's biggest bank, wrote in a research note yesterday. ``The BOE might continue to cut rates at a fast pace. We expect sterling to come under further significant downward pressure.''

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net