Aug. 17 (Bloomberg) — The yen rose, set for the biggest weekly gain versus the dollar and the euro in almost nine years, as traders fled higher-yielding assets funded by loans in Japan.
“Investors have completely lost confidence” in taking risk, said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo, the second-biggest foreign-exchange trader. “There’s strong interest to buy the yen.”
The yen has strengthened at least 4 percent against all 16 most-active currencies this week as a global rout in equities and emerging-market assets spurred investors to exit so-called carry trades. New Zealand’s dollar declined the most, set for the largest weekly loss since December 1985, after a measure of yen volatility jumped to the highest in eight years.
Japan’s currency climbed 5.1 percent to 112.63 against the dollar at 7:29 a.m. in London from 118.40 a week ago in New York. It touched 112.01 yesterday, the strongest since June 2006. It rose 7.3 percent to 151.04 per euro from 162.13 last week, the biggest gain since the introduction of the euro in 1999. The yen may strengthen to 112 against the dollar and 150 per euro today, Muta said.
UBS AG said its Risk Index reached a record 2.53, higher than after the Sept. 11, 2001, terrorist attacks on the U.S. and the collapse of hedge fund Long-Term Capital Management LP in October 1998. The yen, which had been weakening for years, subsequently surged 20 percent in less than two months as investors who’d borrowed cheaply in the currency rushed to exit.
“Our Risk Index signals it’s a crisis that may be similar to or even worse than 1998,” Muta said.
`Thin and Disorderly’
Volatility on one-month dollar-yen options rose to 23.5 percent, the highest since January 1999, and volatility on one- month euro-yen options gained to 23.50 percent, the highest since September 1999. Higher volatility discourages carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.
“Volatility is extremely high as the markets are staying choppy,” said Masashi Kurabe, currency manager at Bank of Tokyo- Mitsubishi UFJ Ltd. in Tokyo. “This is conducive for yen buying.”
The Reserve Bank of Australia propped up its currency yesterday after it tumbled 4.5 percent versus the U.S. dollar, the most since at least 1983.
The global credit crunch has made financial markets “extremely skittish,” central bank Governor Glenn Stevens said today on Queensland’s Gold Coast. “Where market conditions are disorderly, we are prepared to intervene from time to time.”
The Australian dollar traded at 78.02 U.S. cents from 78.68 late in Asia yesterday. Australia’s currency, a favorite of the carry trade because its interest rate is 6 percentage points higher than Japan’s, also reversed gains over the past year, falling 0.6 percent. It fell to 87.87 yen from 90.10 yen in New York yesterday.
ECB Rate Bets
New Zealand’s dollar, another favorite of the carry trade, has reduced gains to 1.6 percent in the past 12 months. It was at 75.42 yen from 78.37 yen.
The euro headed for its biggest weekly loss versus the dollar since June 2006 on speculation the global credit market turmoil will prompt the European Central Bank to delay raising interest rates in September.
“The ECB may postpone a rate hike next month,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. “It would be a bit negative for the euro,” which may drop to $1.3380 and 150.30 yen today, he said.
Interest-rate futures show traders pared bets on one more rate increase from 4 percent this year. The implied yield on the December Euribor contract was at 4.295 percent, down from 4.325 percent yesterday. 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.
Further Dollar Weakness
The dollar may weaken on speculation a U.S. report today will show U.S. consumer confidence fell in August, backing the case for the Fed to lower interest rates.
The U.S. currency may trim this week’s 2.1 percent advance against the euro after reports yesterday showed builders started work on the fewest homes in a decade in July and manufacturing in the Philadelphia region unexpectedly stalled this month.
“The risk is definitely to the downside in terms of how it should impact the economy,” said Thomas Harr, a senior foreign- exchange strategist at Standard Chartered Plc in Singapore. “In the near term, we can see further dollar weakness.”
The dollar traded at $1.3411 per euro from $1.3426. It may decline to $1.3900 by the end of September, Harr said.
Fed funds futures show traders see a 64 percent chance policy makers will cut the key rate by 50 basis points to 4.75 percent in September, up from zero percent a week earlier.
The Reuters/University of Michigan’s final preliminary index of consumer sentiment fell to 88.0 this month from 90.4 in July, according to a Bloomberg News survey of economists.
Taken from Bloomberg.com
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