Aug. 21 (Bloomberg) — The yen fell against the euro and the dollar, heading for the first three-day slide in seven weeks, as gains in stock markets encouraged investors to resume buying higher-yielding assets funded by loans in Japan.
The yen is reversing the biggest weekly gain since March as an equity rally in the U.S. and Europe eased concern a global rout that erased more than $5.5 trillion of market value will resume. Japan’s currency also declined on speculation the Bank of Japan will keep its benchmark rate at 0.5 percent, the lowest among major economies, encouraging investors to borrow yen to invest overseas, known as a carry trade.
“The Bank of Japan will skip a rate hike this week and interest-rate differentials will widen,” said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which oversees the equivalent of $41.5 billion in assets. “This gives momentum to the yen carry trade.”
The yen fell to 155.02 per euro at 12:30 p.m. in Tokyo from as high as 154.34 and 154.94 late in New York yesterday. It also dropped to 115.10 against the dollar from as strong as 114.61 and 114.88 yesterday. Japan’s currency may fall to 115.50 per dollar and 157 a euro today, Sakurai said.
Australia’s dollar, a favorite of the carry trade, recouped a loss of as much as 1.2 percent to trade at 92.55 yen. New Zealand’s dollar, another favorite because of its 8.25 percent interest rate, rose for a third day, to 80.37 yen from 80.27 yen.
Still Looking Overseas
Japan’s Nikkei 225 Stock Average added 1.5 percent and the Morgan Stanley Capital International Asia-Pacific Index of regional shares gained 1.7 percent. The Dow Jones Industrial Average added 0.3 percent yesterday and the Standard & Poor’s 500 Index recouped a 1 percent loss to close little changed.
Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson will meet with Senate Banking Committee Chairman Christopher Dodd today to discuss responses to “ongoing turmoil” in the markets.
Dodd plans to discuss recent market volatility, the broader implications for the economy and additional steps policy makers can take to stabilize the situation and help homeowners, his office said yesterday. The closed-door meeting Dodd requested will be held in his Senate office in Washington at 10 a.m. and the senator will hold a news conference afterward.
“Gains in stocks are weighing on the yen,” said Takuma Kurosawa, global markets treasurer at HSBC Bank in Tokyo. “Some people are still looking for the chance to buy overseas assets and put on carry trades. This shows that the initial wave of the subprime crisis may have subsided.” The yen may fall to 115.50 against the dollar today, he said.
Rising Volatility
Losses in the yen may be limited by speculation rising volatility will increase the risk of re-entering carry trades.
“Many investors are still looking for the yen to gain,” said Hiroshi Yoshida, foreign exchange trader at Shinkin Central Bank in Tokyo. “Low volatility is essential for yen carry trades. Implied volatilities are still relatively high, so it isn’t that easy to re-enter these trades.”
The yen may rise to 114.20 per dollar and 153 against the euro today, Yoshida said.
Volatility on one-month dollar-yen options rose to 15.00 percent from 14.50 percent. Higher volatility discourages carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.
ECB Rates
Any gains in the euro may be curbed by speculation a German report today will show investor confidence fell for a third month in August, suggesting growth in Europe’s largest economy may have peaked.
Europe’s single currency may fall as the ZEW Center for European Economic Research’s index of investor and analyst expectations declined to a seven-month low of minus 1.5 after equity markets tumbled, according to the median of 36 forecasts in a Bloomberg News survey. Traders pared bets the European Central Bank will raise interest rates from 4 percent by year-end.
“Amid concern over lower global stock prices and instability in the financial market, it should be very difficult for the ECB to raise rates,” said Masaki Fukui, a senior economist and currency analyst at Mizuho Corporate Bank Ltd. in Tokyo. “Worsening business sentiment will make it even more difficult,” pushing down the euro to $1.3350 per dollar in one week, from $1.3476.
Investors cut wagers the ECB will lift borrowing costs, futures trading shows. The implied yield on the December contract has fallen 15 basis points in the past week to 4.25 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999.
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