Yen Rises on Speculation Stock Losses Will Curb Carry Trades

By Ron Harui and Stanley White

Nov. 26 (Bloomberg) -- The yen rose against the euro and the dollar as declines in Asian stocks prompted investors to pare holdings of higher-yielding assets funded in Japan.

The currency also gained versus the Australian dollar and the British pound on speculation the Federal Reserve's $800 billion plan to unfreeze credit markets won't prevent a protracted global slump. The U.S. economy, the world's biggest, shrank in the third quarter as consumer spending plunged the most in three decades, according to figures released yesterday.

``The yen should remain supported,'' said Osao Iizuka, head of foreign-exchange trading at Sumitomo Trust & Banking Co. in Tokyo. ``There was a bounce in sentiment after the Fed's announcement of its latest measures. This has faded, because there are still a lot of problems to work out.''

The yen rose to 123.72 per euro at 10:14 a.m. in Tokyo from 124.43 late yesterday in New York. It also strengthened to 95.02 per dollar from 95.22. The euro fell to $1.3024 from $1.3064. The pound declined to $1.5414 from $1.5472. The yen may rise to 94.80 per dollar today, Iizuka said.

Against the yen, Australia's dollar fell to 61.59 from 61.82 in New York late yesterday. The pound dropped 0.6 percent to 146.44 yen.

The MSCI Asia Pacific Index of regional shares slid 0.6 percent, while the Nikkei 225 Stock Average fell 1.6 percent.

Japan's benchmark interest rate of 0.3 percent compares with 5.25 percent in Australia and 3 percent in the U.K.

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.

`Fed's Balance Sheet'

The U.S. currency may weaken should the Fed lose money on the debt and asset-backed securities it plans to buy. The dollar reached a 2 1/2-year high against an index of the currencies of six major U.S. trading partners last week as investors sought refuge from deepening credit losses.

``We may see the Fed's balance sheet deteriorate because it's taking on all these assets,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``This is a latent risk for the dollar that could weaken it over the long term.''

The Fed will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a program of $200 billion to support consumer and small-business loans, the Fed said in statements yesterday in Washington.

OECD Cuts Forecast

The Organization for Economic Cooperation and Development cut its forecast for global growth in 2009. The economies of the organization's 30 members will contract 0.4 percent next year, after expanding 1.4 percent this year. Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July through September, the most since the 2001 recession, according to revised figures from the Commerce Department in Washington.

The ICE's Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden's krona, traded at 85.013 from 85.000 yesterday, when it fell 1.3 percent. The index rose to 88.463 on Nov. 21, the highest level since April 2006.

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