Yen Weakens as Asian Stocks Rebound, Reviving Demand for Yield

By Ron Harui and Stanley White

Nov. 21 (Bloomberg) -- The yen declined against the dollar and the euro as a rebound in Asian equities revived demand for higher-yielding assets financed with loans in Japan.

The yen also weakened against the Australian dollar, a favorite of so-called carry trades, after the Reserve Bank of Australia bought its own currency for at least the fifth time in four weeks. The dollar dropped versus the euro on speculation the Federal Reserve will cut interest rates and flood the financial system with cash as a recession causes prices to fall.

``Stock markets are recovering and Australian monetary authorities seem to be intervening to buy the Aussie against the U.S. dollar,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo, referring to Australia's currency by its nickname. ``This is spooking people into selling the yen.''

The yen fell to 94.90 per dollar as of 7:39 a.m. in London from 93.69 late yesterday in New York, trimming this week's gain to 2.3 percent. It dropped to 118.84 per euro from 116.68 yesterday. The euro bought $1.2522 from $1.2453, paring its weekly decline to 0.7 percent.

Japan's currency weakened to 59.06 versus Australia's dollar from 57.23 late yesterday in New York. The Australian dollar traded at 62.11 U.S. cents from 61.07 cents.

The MSCI Asia-Pacific Index of regional shares gained 2.9 percent, after earlier sliding as much as 2.3 percent. U.S. stock-index futures climbed, pointing to gains after the Standard & Poor's 500 Index yesterday closed at an 11-year low.

RBA Intervention

The RBA bought a record A$3.15 billion in the market in October, it said yesterday, as the Australian dollar touched 60.10 U.S. cents, the lowest level since 2003. An RBA spokesman confirmed the bank bought Australian dollars this morning, ``providing liquidity as on previous occasions.''

The yen still headed for a third weekly gain against the dollar and the euro as U.S. lawmakers held off taking action on a bailout requested by the nation's automakers, spurring a reduction in so-called carry trades.

``Money is flowing back to funding currencies like the yen,'' said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``It's difficult to change the trend of stock declines pushing up the yen. Until we reach a conclusion on U.S. automakers, risk is off the table.''

U.S. Democratic congressional leaders said yesterday they will delay action at least until next month on government support for General Motors Corp., Ford Motor Co. and Chrysler LLC as the three companies haven't yet made a case for the help.

`Global Recession'

Honda Motor Co. said yesterday it is trimming production plans at U.S. plants by 18,000 more vehicles as sales decline. Honda, Toyota Motor Corp. and Nissan Motor Co. traditionally earn at least half of their operating profit in the U.S. A stronger yen erodes the value of the carmakers' overseas sales.

JPMorgan Chase & Co. forecasts the yen will advance to 87 against the dollar and 103 per euro by year-end.

``There's strong possibility that the yen will continue appreciating as the global recession may deepen,'' said Tohru Sasaki, chief currency strategist in Tokyo at JPMorgan Chase & Co. and a former chief foreign-exchange trader at the Bank of Japan. ``It's an environment where losses in cross-yen currencies are likely to be even bigger than those in the dollar-yen.''

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.

BOJ Rates

The Bank of Japan kept its benchmark rate at 0.3 percent today and said it will consider pumping more money into the financial system to prop up an economy that fell into a recession last quarter. Japan's rate compares with 6.5 percent in New Zealand, 3 percent in the U.K., 8.25 percent in Mexico and 4 percent in South Korea.

The central bank's unanimous rate decision followed a cut from 0.5 percent last month, the first in seven years. BOJ Governor Masaaki Shirakawa said at a press conference after the decision that he's mindful lowering rates further may impair the functioning of money markets while saying he won't rule out any options for policy.

Gains in the dollar may be limited before speeches by Fed officials today. Richmond Fed President Jeffrey Lacker speaks about the economy at 8:15 a.m. in Bethesda, Maryland. Philadelphia Fed President Charles Plosser and Chicago Fed President Charles Evans also speak today.

The Fed's record injections of liquidity to stabilize the financial system have driven the overnight lending rate between banks to less than half the 1 percent target set by officials last month. The gap is shifting investor focus toward the amount of money in the system as a better gauge of Fed intentions.

``I don't think there's a way of avoiding the fact that extremely low interest rates and excess liquidity are negative for the dollar,'' said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. ``The Treasury market is clearly showing people don't expect much inflation. This is not going away.''

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