Yen Near Six-Week High as Stock Losses Reduce Demand for Risk

By Matthew Brown and Yoshiaki Nohara

Nov. 20 (Bloomberg) -- The yen rose, trading near a six- week high against the dollar as Asian stocks extended the biggest drop in global equities this month, spurring demand for the Japanese currency as a refuge.

The greenback headed for its fourth-straight weekly loss versus the yen on speculation the Federal Reserve will keep interest rates near zero to spur growth. The Australian and New Zealand dollars were set for their first weekly decline against the U.S. currency this month on speculation the global recovery will be sluggish. China’s yuan forwards were on course for the biggest weekly loss in 10 months on bets Chinese officials will rebuff international calls for the currency to appreciate.

“This week’s moves for the dollar and the yen are down to weaker risk sentiment,” said Paul Robinson, a currency strategist in London at Barclays Plc. “It’s probably going to be brief as central banks continue to keep policy rates super low, pumping liquidity into the system.”

The yen traded at 88.86 per dollar as of 8:35 a.m. in London, from 88.97 in New York yesterday, when it rose to 88.64, the highest level since Oct. 9. The currency appreciated to 132.48 per euro, from 132.79, set for a gain this week. The dollar was at $1.4908 per euro, from $1.4925, after earlier rising as high as $1.4882.

The Nikkei 225 Stock Average fell 0.5 percent, capping its fourth-straight weekly loss, the longest since October 2008. The MSCI World Index of shares was headed for its first decline in three weeks. Falling stocks discourage so-called carry trades, in which investors buy higher-yielding assets with funds borrowed in nations with relatively low interest rates.

‘Passive’ Yuan

China has a “passive” position on the value of the U.S. dollar as the level doesn’t affect the Asian nation’s economy, central bank Governor Zhou Xiaochuan said today.

U.S. President Barack Obama this week urged China to allow the yuan to gain. His Chinese counterpart Hu Jintao made no mention of the currency’s peg to the greenback in a joint briefing on Nov. 17.

“Zhou’s words may indicate China won’t let the yuan float in the short-term,” said Shi Lei, a Beijing-based financial market analyst at Bank of China Ltd. “Policy makers are concerned that more flexibility in monetary policy, including the exchange rate, will cause assets bubbles.”

Dollar Trend ‘Intact’

The dollar pared earlier gains on speculation unemployment at a 26-year high will encourage the Fed to maintain low borrowing costs for an extended period.

Dallas Fed President Richard Fisher said yesterday in Washington it will be “some time” before the unemployment rate falls below 10 percent. Fisher said the 3.5 percent annual rate of growth reported for the third quarter may be revised lower, and that the economy is still “quite flaccid.”

“The mainstream trend is intact: dollar weakening,” said Yoshihiro Nomura, foreign-exchange team manager at Trust & Custody Services Bank Ltd. in Tokyo. “There are no new factors that would change the trend in the near future. I expect the Fed will keep rates on hold through next year.”

Japan’s currency rose against 15 of its 16 major currency peers after the Bank of Japan left its benchmark interest rate at 0.1 percent at the end of its policy meeting today. The central bank raised its monthly assessment, saying the economy is picking up.

Carry Trades

Borrowing costs near zero in the U.S. and 0.1 percent in Japan make their currencies popular for funding carry trades. The Reserve Bank of Australia this month became the first central bank to increase borrowing costs twice this year, raising rates to 3.5 percent.

Australia’s dollar traded at 91.74 U.S. cents, from 91.86 cents, down 1.7 percent in the week. The New Zealand dollar was at 72.89 U.S. cents, from 73.11 cents, extending its decline in the five days to 2 percent.

The won dropped for a second day against the dollar after Kim Jong Chang, governor of the Financial Supervisory Service, said late yesterday, without elaborating, that government agencies plan to hold talks on what can be done to address inflows financed with cheap dollar loans.

“These measures are taken to prevent destabilizing effects of capital inflows, but should not be taken as capital controls,” said Mirza Baig, a currency strategist in Singapore at Deutsche Bank AG. “U.S. equities came off last night and that should have some impact on Asian currencies.”

The Korean financial regulator yesterday announced tightened rules on lenders’ foreign-currency funding. The measures, including limits on the amount of foreign-currency forward contracts banks sign with companies, aren’t aimed at affecting the “in and out” of overseas capital, Kim said.

The won declined 0.2 percent to 1,159.05, according to data compiled by Bloomberg. It fell as low as 1,168.65, the weakest level since Nov. 9.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net