Yen Strengthens Versus the Euro as Recession Curbs Carry Trades

By Stanley White and Ron Harui

Nov. 18 (Bloomberg) -- The yen gained against the euro for a third day as the prospect of a global recession prompted investors to sell higher-yielding assets and pay back low-cost loans in Japan's currency.

Japan's currency also strengthened against the Brazilian real as Asian stocks followed Wall Street lower. The Australian and New Zealand dollars declined on concern recessions in the U.S., Europe and Japan will crimp demand for the commodities exported by the South Pacific nations.

``We're not likely to see any good economic news for some time,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``Stocks and commodities show we're in a recession. In this environment the yen is likely to gain.''

The yen was at 121.74 per euro as of 9:37 a.m. in Tokyo from 121.99 late yesterday in New York. It was quoted at 96.44 versus the dollar from 96.43. The euro slid to $1.2616 from $1.2650. The pound was quoted at $1.4946 from $1.4989.

The yen may rise to 121 per euro and 95.50 against the dollar today, Ishikawa said.

Japan's currency rose to 42.3042 per Brazilian real from 42.4243. In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's benchmark rate of 0.3 percent is the lowest among major economies.

Yen Benefit

``The yen continues to benefit from risk aversion,'' wrote currency strategists led by Zurich-based Mansoor Mohi-uddin at UBS AG, the world's second-largest foreign-exchange trader, in a research report yesterday. ``Our core view remains that the low- yielding safe haven currencies will stay supported as the central banks of higher-yielding currencies are forced to cut interest rates further.''

UBS forecasts the yen may strengthen to 90 against the dollar and 108 versus the euro in one month.

The Federal Reserve Bank of New York said yesterday its general economic index fell this month to minus 25.4, the lowest level since records began in 2001. Readings below zero signal New York State manufacturing shrank. The MSCI Asia Pacific index of regional shares fell 1 percent after U.S. stocks tumbled yesterday, extending a two-week decline.

Japan's economy entered a recession in the third quarter as corporate spending and export demand slumped, data showed yesterday. The 15 countries that share the euro are also in a recession, a report showed last week.

Weaker Pound

The pound depreciated to $1.4557 on Nov. 13, the lowest level since June 2002, and 86.63 pence per euro, the weakest since the 15-nation currency's 1999 debut, as the U.K. economy fell into a recession.

Sterling will drop early next year to $1.28 per dollar, the lowest since 1985, as U.K. banks shrink foreign borrowings and the country's policy makers favor a weaker currency, wrote Paul Meggyesi, a foreign-exchange strategist at JPMorgan & Chase Co., in a research note Nov. 14. Sterling will weaken to a record 92 pence per euro, he wrote.

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 on slumping global economies.

Gains in the yen may erode Japanese exporters' earnings by eroding the local-currency value of their overseas sales. The yen's 16 percent appreciation against the dollar this year contributed to companies including Toyota Motor Corp. slashing profit forecasts and cutting investment.

Toyota, which makes more than three-quarters of its sales abroad, forecast profit will fall this fiscal year by almost 70 percent. The automaker will fire 3,000 workers by March, and the Nikkei newspaper reported this month that it will delay adding capacity at a domestic plant that makes Lexus sedans.

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