Yen Trades Near 5-Week High on Signs Global Slowdown Deepening

By Ron Harui and Stanley White

Dec. 2 (Bloomberg) -- The yen traded near a five-week high against the dollar on speculation declines in global manufacturing and stocks prompted investors to sell higher- yielding assets funded in Japan’s currency.

The yen earlier climbed to the strongest level in more than a week versus the euro on mounting evidence of a deepening economic slump. The Australian dollar fell against the Japanese and U.S. currencies after the central bank lowered its benchmark interest rate by 1 percentage point, more than most economists forecast, and the lowest level in six years.

“Sliding global equities are likely to increase risk aversion among investors, putting upward pressure on the yen,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Plc in Tokyo and a former Bank of Japan currency trader. “We may see the yen re-test this year’s high of 90.93 against the dollar in the near term.”

The yen traded at 93.20 per dollar as of 7:22 a.m. in London from 93.19 late in New York yesterday. It reached 92.89, the highest level since Oct. 28. The currency was at 117.61 per euro from 117.52. It touched 117.24, the strongest since Nov. 21. The dollar was little changed at $1.2620 per euro.

Japan’s currency gained 2 percent to 15.71869 against South Korea’s won as the MSCI Asia Pacific index of regional shares dropped 4.5 percent following a slump in U.S. and European stocks.

Buy Yen

Economic and Fiscal Policy Minister Kaoru Yosano said today the yen’s advance is hurting exporters though the strength in the currency isn’t a bad thing in itself.

The benchmark interest rate of 0.3 percent in Japan compares with 3.25 percent in the euro zone, and 4.25 percent in Australia. In carry trades, 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.

“As Japan’s economy falters, risk aversion will likely rise among Japanese investors,” Stephen Jen, global head of currency research at Morgan Stanley in London, wrote in a research note yesterday. “Our year-end target for dollar-yen is 90, but this could be broken. The yen should be bought now.”

The Australian dollar fell 0.8 percent to 63.56 U.S. cents and 1.5 percent to 59.19 yen from late in Asia yesterday. The Reserve Bank of Australia said economic conditions warranted the larger-than-expected rate reduction. The RBA also said its benchmark rate is now at a level that will stimulate growth.

Global Rate Cuts

Policy makers will also lower interest rates this week to 5 percent from 6.5 percent in New Zealand, to 2 percent from 3 percent in the U.K. and to 2.75 percent in the euro region as central banks move to stem the economic slowdown, according to the median forecasts of analysts in separate Bloomberg surveys.

The Institute for Supply Management’s U.S. factory index fell to 36.2 in November, the lowest level since 1982, the Tempe, Arizona-based group reported yesterday. A reading of 50 is the dividing line between expansion and contraction. Similar gauges for the euro zone and the U.K. dropped to records.

General Motors Corp., Ford Motor Co. and Chrysler LLC may need $40 billion to carry them through the current sales slowdown, almost two-thirds more than they’re seeking in U.S. aid, Jerome York, a former GM board member, said yesterday. The three carmakers are presenting plans to Congress today.

The yen declined earlier against the dollar and the euro on speculation Japanese importers bought foreign currencies before the year ends.

Bank of Japan

The Bank of Japan kept its benchmark rate at 0.3 percent today following an October cut in the overnight lending rate from 0.5 percent and said it will accept lower grade corporate bonds as collateral for loans to banks to unlock credit markets.

The central bank will begin accepting BBB or higher-rated corporate debt on Dec. 9 and will start a new lending facility for commercial banks in January, it said in a statement after an emergency meeting today in Tokyo.

“Japanese importers are likely to find these levels attractive to buy dollars to meet their year-end financing needs,” said Katsunori Kitakura, chief treasury dealer in Tokyo at Chuo Mitsui Trust & Banking Co., Japan’s seventh-largest publicly listed lender. “Even though the BOJ lowered rates, that still hasn’t reduced companies’ funding costs.”

Gains in the euro may be limited before a European report today that may show gains in producer prices slowed in October for a fourth month, giving the central bank more scope to cut rates on Dec. 4.

“The ECB is expected to lower borrowing costs,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. “The euro may be sold, particularly against the yen, as the euro area’s rate gap with Japan is likely to narrow.”

Producer prices in Europe rose 7 percent in October from a year earlier, after a 7.9 percent increase in September, according to a Bloomberg survey of economists. The European Union statistics office will release the report at 11 a.m. in Luxembourg.

The ECB will cut its main refinancing rate by half a percentage point to 2.75 percent this week, a separate Bloomberg survey shows.

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