Yen Rises on Speculation Drop in Stocks Will Sap Carry Trades

By Ye Xie and Andrew Macaskill

Nov. 19 (Bloomberg) -- The yen advanced against the dollar as traders speculated that a global drop in stocks will prompt investors to sell higher-yielding assets and pay back low-cost loans in Japan's currency.

Japan's yen also gained against the Australian dollar and the South Africa rand on bets the deepening global economic slump will discourage carry trades. The pound rose against the dollar and the euro as minutes of the Bank of England meeting this month indicated policy makers are prepared to cut interest rates again to revive the economy.

``The currency market just swings around equities,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York. ``If equities can't hang in there, the yen will gain.''

The yen rose 0.1 percent to 96.90 against the dollar at 8:35 a.m. in New York, from 97.03 yesterday. Japan's currency traded at 122.53 per euro, compared with 122.43. The euro rose 0.2 percent to $1.2646, from $1.2618. The pound increased 0.5 percent to $1.5036 from $1.4958.

Japan's currency increased 0.9 percent to 62.74 against the Australian dollar and 2.4 percent to 9.26 versus the rand on speculation investors will unwind trades in which 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 3.25 percent in Europe, 5.25 percent in Australia and 12 percent in South Africa.

Drop in Stocks

Europe's Dow Jones Stoxx 600 Index declined 1.6 percent, while Standard & Poor's 500 Index futures lost 1.2 percent.

The yen has advanced 14 percent versus the dollar, 33 percent against the euro and 53 percent against the Australian dollar in the past three months as the global economy headed toward a recession.

Nissan Motor Co., Japan's third-largest automaker, told the Wall Street Journal that profit in the second half will go to ``zero'' because of lower sales in the U.S. and a stronger yen.

``I would recommend a continuation pattern of buying the yen,'' said David Bloom, the London-based global head of currency strategy at HSBC Plc, Europe's biggest bank by market value. ``Don't throw your coin in the well and wait around listening for the bottom of the market. This financial crisis is not over.''

The U.S. should reduce its trade and budget deficits to support the dollar because it's the world's reserve currency, Japan's Vice Finance Minister for International Affairs Naoyuki Shinohara said today in a speech in Sydney.

A $700 billion U.S. financial stability package isn't intended to prevent General Motors Corp., Ford Motor Co. and Chrysler LLC from collapsing, Treasury Secretary Henry Paulson said at a House of Representatives hearing yesterday.

GM on Economy

The U.S. economy would suffer a ``catastrophic collapse'' if domestic carmakers fail, GM Chief Executive Rick Wagoner told a Senate panel yesterday. Three million jobs would be lost within the first year, and government tax losses would total $156 billion over three years, Wagoner told a Senate panel.

Housing starts in the U.S. dropped to an annual rate of 791,000 in October from 828,000 in the previous month, the Commerce Department reported. The median forecast of 75 economists surveyed by Bloomberg News was for a drop to 780,000 from a previously reported 817,000.

U.S. consumer prices fell 1 percent last month after being unchanged in September, the Labor Department reported. The Fed will release at 2 p.m. New York time minutes of its meeting on Oct. 29, when policy makers cut the fed funds target by a half- percentage point to 1 percent.

Bank of England policy makers considered an even bigger reduction in the benchmark interest rate than the 1.5- percentage-point cut announced on Nov. 6 as their forecasts pointed to a deepening recession.

The possible need for a cut to less than 2.5 percent was discussed at the Monetary Policy Committee's meeting, according to minutes published today by the central bank in London. Governor Mervyn King and his colleagues voted 9-0 to lower the rate to 3 percent from 4.5 percent.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Andrew Macaskill in London at amacaskill@bloomberg.net