Yen Gains as Traders Pare Carry Trades on Credit-Market Losses
The yen rose against 14 of the 16 most-active currencies as signs credit-market losses are worsening prompted investors to pare carry trades, where they use funds from Japan to buy higher-yielding assets.
The yen had its biggest gain against the euro in a week as UBS AG said 2008 will probably be another “difficult” year for financial services companies and the New York Times reported Merrill Lynch & Co. may write down $15 billion from mortgage- related losses. The Canadian dollar fell versus all 16 major currencies after the economy unexpectedly lost jobs last month.
“The market is very skittish,” said Mark Meadows, a strategist at currency-trading company Tempus Consulting Inc. in Washington. “Nobody knows how much the banks lost on subprime mortgages. When we hear this kind of news, stocks sell off and the yen strengthens.”
The yen advanced to 109.04 per dollar at 11:16 a.m. in New York, from 109.33 yesterday, declining 0.4 percent this week. It advanced to 161.31 per euro, from 161.88, falling 0.8 percent in the past five days. The dollar traded at $1.4792 against the euro, from $1.4804.
Japan’s currency surged 1.2 percent against Canada’s currency to 106.95 yen, while climbing 0.5 percent to 17.19 per Swedish krona, which declined versus 15 of 16 major currencies.
Canada’s Dollar
Canada’s dollar fell for a sixth day against its U.S. counterpart, the longest losing streak since March, as the economy lost 18,700 jobs in December. The Canadian currency touched C$1.0222 per U.S. dollar, the lowest since Dec. 17.
The U.K.’s pound fell to as low as 75.87 pence per euro, the weakest since the single currency’s introduction in 1999, before trading at 75.51 pence from 75.48 yesterday.
Japan’s Nikkei 225 Stock Index fell 1.9 percent to 14,110.79, the lowest since Nov. 15, 2005. Stocks in the U.S. and Europe weakened. The Standard & Poor’s 500 Index declined 0.7 percent.
Investors exited carry trades, in which they 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 moves erase those profits.
Bank of Japan Governor Toshihiko Fukui said the country’s economic growth is slowing “for the time being” as housing investment declines.
`Risk Aversion’
“The yen’s only strength comes from risk aversion,” said Boris Schlossberg, senior currency strategist in New York at currency dealer DailyFX.com. “2008 will be the year when interest rates globally will compress, and that’s negative for the carry trades.”
The yen will trade between 107 and 111 per dollar in the next two weeks, Schlossberg said.
The Australian dollar, a favorite of the carry trade, depreciated 0.4 percent to 97.54 yen.
Japan’s benchmark interest rate of 0.5 percent is the lowest among major economies no fax payday loan. Interest rates are 8.25 percent in New Zealand, 6.75 percent in Australia, 5.5 percent in the U.K. and 4 percent for the 15 countries that share the euro.
Merrill is trying to raise $4 billion from investors in the U.S., Asia and the Middle East to shore up its finances, the New York Times said, citing people it said were briefed on the plan. The bank is expected to disclose the loss when it reports earnings next week, the newspaper said.
Zurich-based UBS, Europe’s biggest bank by assets, urged shareholders to support its plan to raise 13 billion Swiss francs ($11.8 billion) from Government of Singapore Investment Corp. and an unidentified Middle Eastern investor, according to a letter posted on its Web site.
`Strengthening Further’
“Merrill’s writedown is unsettling,” said Carl Forcheski, vice president on the corporate currency sales desk at Societe Generale SA in New York. “The fact that more of this kind of bad news is coming prolongs the agony in the market. The yen is vulnerable to strengthening further.”
The yen may touch 107.23 per dollar in the next two weeks, Forcheski said. The Japanese currency touched that level on Nov. 26, the strongest since June 2005.
One-month implied volatility for the yen against the British pound rose to 14.75 percent, from 14.2 percent yesterday. A rise in volatility tends to discourage carry trades as it makes profits more unpredictable.
Dollar’s Weekly Decline
The dollar headed for a third consecutive weekly decline versus the euro, the longest losing streak since the period ended Nov. 9. Federal Reserve Chairman Ben S. Bernanke yesterday said more interest-rate cuts “may well be necessary.”
European Central Bank President Jean-Claude Trichet yesterday kept borrowing costs unchanged and said the central bank will “not tolerate” an inflation spiral.
Futures contracts on the Chicago Board of Trade show 68 percent odds the Fed will cut its target rate of 4.25 percent for overnight bank loans by a half-percentage point on Jan. 30.
“I’m in the dollar-bear camp,” said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Connecticut. “Economic standings in other countries are faring better than ours. The dollar needs to depreciate another 4 to 5 percent before it starts to offer value.”
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