Yen falls on carry trades

Yen Falls as Gains in Stocks Spurs Confidence in Carry Trades
By Ron Harui and David McIntyre

Oct. 8 (Bloomberg) -- The yen fell to the lowest in two months against the euro as gains in global stocks gave traders confidence to increase holdings of higher-yielding assets funded with money borrowed in Japan.

The yen slid versus 15 of the 17 most-active currencies as investors increased so-called carry trades on bets Asian equities will follow U.S. stocks higher. It fell most against the New Zealand and Australian dollars after the Standard & Poor's 500 Index rose to a record last week as U.S. employment growth eased concern the world's largest economy will slip into recession.

``The yen hasn't found a low versus the euro yet,'' said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``The carry trade is back in vogue and the U.S. economy is going okay.''

The yen declined to 165.46 per euro at 8:25 a.m. in Singapore from 165.38 late in New York Oct. 5. It touched 165.80, the lowest since July 25 and may extend losses to 167.50 over the next week, Pontikis forecast. Japan's currency traded at 117.05 per dollar from 116.97.

Australia's dollar climbed to 105.40 yen, the highest since July 27, from 104.02 yen late in Asia on Oct. 5. New Zealand's dollar rose to a two-month high of 89.39 yen from 88.32 yen. Trading may be 40 percent less than usual as Japanese and U.S. markets are closed for a holiday, said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney.

The Morgan Stanley Capital International Asia-Pacific Index of regional shares rose for a second day, adding 0.2 percent.

`Beginning to Hurt'
Gains in the euro may be limited by speculation a European finance ministers meeting today will discuss ways to stem the advance. French Finance Minister Christine Lagarde said on Oct. 5 the meeting should talk about the sale of euros by the European Central Bank. The euro strengthened to a record for eight straight days to Oct. 1, reaching $1.4283. It rose to a 10-week high of 165.80 yen today and traded at $1.4137 versus the dollar.

``There's quite a strong risk that they'' may agree on the need to take action against the euro's strength, said Westpac's Rennie. ``That is something that's going to prevent further gains in the euro-dollar and the euro-yen. You've got a currency that is beginning to hurt.''
The euro may decline to $1.3900 and 163 yen this week, Rennie forecast.

European officials including Italian Prime Minister Romano Prodi and his Luxembourg counterpart Jean-Claude Juncker last week said they are concerned about the euro's potential effect on the economy. Euro-region finance ministers meet at 5 p.m. in Luxembourg.
The dollar also may be supported after International Monetary Fund's Managing Director Rodrigo de Rato said the U.S. currency is ``undervalued,'' the Financial Times reported yesterday, citing an interview.