Yen Climbs to Four-Month High Against Euro on Subprime Losses
By Ron Harui and David McIntyre
Aug. 15 (Bloomberg) -- The yen rose to a four-month high against the euro and the New Zealand dollar as widening credit- market losses prompted investors to cut higher-yielding assets funded by loans in Japan.
The yen has gained against all 16 most-active currencies this month as investors exited so-called carry trades that have pushed down the yen 6.5 percent versus the euro in the past year. Japan's currency has surged 8.5 percent against New Zealand's dollar in August, heading for the best month in seven years.
``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 climbed to 158.62 per euro at 12:40 p.m. in Tokyo, the strongest since April 5, and to 117.33 per dollar from 117.57. It rose 1.2 percent against the euro and 0.6 percent versus the dollar yesterday.
The Nikkei 225 Stock Average fell 1.6 percent and the Morgan Stanley Capital International Asia-Pacific Index of shares declined 1.7 percent after U.S. stocks dropped yesterday. The Standard & Poor's 500 Index and Dow Jones Industrial Average fell 1.8 percent and 1.6 percent, respectively.
Coventree Inc., the Canadian firm that failed to sell asset- backed commercial paper because of a credit crunch, said some lenders declined to offer emergency funding for C$700 million ($655.8 million) of maturing debt. Canada's dollar weakened 1.3 percent yesterday, the biggest fall since June 2006, and dropped to 93.51 U.S. cents today.
Positive for Yen
``The credit concerns are ending up in places except the U.S., like Europe, Australia and so forth,'' said Luke Waddington, head of interbank currency sales in Tokyo at Royal Bank of Scotland Group Plc. ``It seems there's a contagion. It's very positive for the yen,'' which may advance to 117.00 against the dollar and 158.30 per euro today, Waddington said.
New Zealand's dollar, a favorite of the carry trade because its interest rate is 7.75 percentage points higher than Japan's, has slid the most among the 16 major currencies in the past week, falling 4.2 percent against the yen. The Australian dollar has dropped 2.3 percent.
The New Zealand dollar declined to 84.60 yen from 85.40 and the Australian dollar fell to 97.64 yen from 98.11, the weakest since April 24 as Basis Capital Fund Management Ltd., an Australian hedge fund battered by declines in the U.S. subprime market, said losses in its Yield Fund may exceed 80 percent.
U.S. Treasuries
Losses in the dollar may be limited by speculation the slump in global credit markets will spur investors to seek the safety of U.S. government debt.
``There's a good chance that they will put their money into Treasuries,'' said Xing Wei, a currency dealer at Shinsei Bank Ltd. in Tokyo. ``It's a plus for the dollar,'' which may gain to 118.00 yen and $1.3500 per euro today.
The yield on the benchmark two-year Treasury notes fell 2 basis points, or 0.02 percentage point, to an 18-month low of 4.34 percent, according to bond broker Cantor Fitzgerald LP.
A Labor Department report may show today the consumer price index last month rose 0.1 percent following a 0.2 percent gain a month earlier, according to a Bloomberg News survey of economists. Inflation excluding food and energy, the so-called core CPI, may have gained 0.2 percent, the same increase as in June, the Bloomberg survey also showed.
Japan's currency will strengthen beyond 116 per dollar by the end of September on concern growing losses on U.S. subprime mortgages will prompt investors to shun riskier assets, according to BNP Paribas.
Hedge Fund Liquidation
Hans Guenter Redeker, global head of currency strategy at France's biggest bank, said the market should be on alert today, when hedge funds will know how much of their funds will be withdrawn at the end of the quarter. Any further liquidation will prompt investors to exit carry trades and repay loans made in yen for purchasing higher-yielding assets.
``Bad news on the subprime market is far from over,'' said London-based Redeker. ``I suspect there will be more hedge fund liquidation. Risk aversion will push funding currencies such as the yen higher.''
The euro fell to the lowest in more than six weeks versus the dollar on speculation subprime losses are spreading to Europe.
The currency dropped for a third day, the longest run since June 28, on concern turmoil in financial markets will prompt the European Central Bank to delay an interest-rate increase next month. A Spanish newspaper reported yesterday Banco Santander SA has more than 2 billion euros ($2.7 billion) of investments in U.S. high-risk loans.
``The longer this goes on, the risk of them not being able to raise rates in September will rise quite significantly,'' said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. ``It's just going to be a case of slow and steady decay for the euro'' to $1.3450 in the next week, he said.
Europe's single currency fell to $1.3517 per dollar, the lowest since June 29, from $1.3533 yesterday.
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