The yen rose to a four-month high against the euro on concern U.S. subprime mortgage losses are spreading to global credit markets, pushing investors to cut higher-yielding assets by loans in Japan.
The yen has gained against all 16 most-active currencies this month as traders exited the so-called carry trades. U.S. stocks tumbled and Treasuries gained yesterday as banks balked at providing emergency financing to 17 Canadian asset-backed commercial paper issuers, and Sentinel Management Group Inc. asked regulators for permission to stop investor redemptions.
“We envisage further yen gains,” said Sue Trinh, a currency strategist at RBC Capital Markets said in Sydney. “The tolerance for risk remains exceptionally low as we see increasing signs of global contagion emanating from the U.S. related to subprime delinquencies.”
The yen traded at 158.95 per euro 8:03 a.m. in Tokyo and reached 158.79, the strongest since April 5. Japan’s currency was at 117.41 per dollar from 117.57. The Japanese currency rose 1.2 percent against the euro and 0.6 percent versus the dollar yesterday.
The yen has rebounded from a record low of 168.99 per euro on July 23, and 124.13 per dollar on June 22, the weakest since December 2002.
Volatility on one-month euro-yen options reached 12.35 percent today, the highest since April 2004. Higher volatility may discourage carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.
`Risk Tolerance’
“It’s a continuation of the unwinding of the carry trades,” said Gareth Sylvester, senior currency strategist at HiFX Plc in San Francisco. “Risk tolerance is continuing to be tested as fresh banks come forward to discuss their exposure to the subprime market. Carry trades are considered risky.”
The dollar may extend its gains against the euro, the pound and currencies in New Zealand and Australia as banks and fund managers scramble to pay back loans in the dollar used to buy risky mortgage securities. Investors also turned to the U.S. dollar for safety amid the subprime fallout.
“When the world is wobbling, even the staunchest of dollar bears clamber back to good old Uncle Sam,” said David Mozina, senior currency strategist at Lehman Brothers Holdings Inc. in New York.
The dollar traded at $1.3532 per euro and $1.9957 per pound. The U.S. currency rose 0.6 percent against the euro and 0.8 percent versus the pound yesterday. The pound traded below $2 for the first time in almost seven weeks yesterday.
Euro and Pound
The U.S. currency has rebounded from a record low of $1.3852 per euro and a 26-year trough of $2.0654 per pound, both set on July 24.
The dollar has gained against all 16 most-actively traded currencies tracked by Bloomberg except the yen since July 20 when a global rout of stocks, corporate bonds and emerging- market assets started.
The New York Board of Trade’s dollar index comparing the U.S. currency against its six primary peers, including the euro and yen, rose 0.5 percent to 81.468 yesterday. The index has rebounded from as low as 79.957 on Aug. 6, the lowest since September 1992.
A U.S. government report is forecast to show the consumer price index last month rose 0.1 percent following a 0.2 percent gain a month earlier. Inflation excluding food and energy, the so-called core CPI, may have gained 0.2 percent, the same increase as in June, according to a Bloomberg survey.
International investors purchased $62.8 billion in U.S. financial assets during June, down from a record $126.1 billion a month earlier, according to a separate Bloomberg poll.
U.S. Stocks Fall
U.S. stocks fell and Treasuries rallied yesterday as investors sold riskier assets and sought refuge in government debt. The Standard & Poor’s 500 Index and Dow Jones Industrial Average declined 1.8 percent and 1.6 percent, respectively.
“We are still in the period where people are moving out of risky assets,” said Hans-Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA. “Carry trades are being unwound. The yen is likely to go up further in this environment.”
Coventree Inc., the Canadian firm that failed to sell asset-backed commercial paper because of a credit crunch, said some lenders balked at providing emergency funding for C$700 million ($655.8 million) of maturing debt. Canada’s dollar declined 1.3 percent yesterday to 93.69 U.S. cents, the biggest one-day fall since June 2006.
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