Yen carry trades unwind

Yen Trades Near Two-Year High Versus Dollar on Growth Concerns

By David McIntyre and Kosuke Goto

Nov. 22 (Bloomberg) -- The yen traded near a two-year high against the dollar on concern widening credit-market losses will slow global economic growth, pushing investors to sell higher- yielding assets financed by borrowing in Japan.

The yen was also close to the strongest in about two months against the Australian and New Zealand dollars, favorites of the so-called carry trade, as global stocks fell. The dollar reached an all-time low against the Swiss franc on concern the Federal Reserve will cut interest rates for a third time this year to prevent subprime mortgage losses dragging the U.S. economy into recession.

``There is yen strength to come,'' said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``People are unwilling to take carry trade positions. You can't have the subprime sector implode without any consequences.''

The yen traded at 108.41 per dollar at 9:21 a.m. in Tokyo after touching 108.26 yesterday, the strongest since June 2005. The currency was at 161.01 per euro from 161.13 late yesterday, when it reached 160.08. Gains in the yen will accelerate should it rise above 108.20 per dollar today, Pontikis said.

The yen traded at 94.53 per Australian dollar from 94.39 yesterday in New York when it reached 93.72, the strongest since Sept. 11. It was at 81.41 against New Zealand's dollar from 81.50 yesterday when it touched 80.72, the highest since Sept. 18. The Nikkei 225 Stock Average fell 0.7 percent today,

Thanksgiving Holiday

Currency fluctuations may be exaggerated because U.S. stock and bond markets are closed today for the Thanksgiving holiday, said Kazuyuki Takami, a manager of the currency trading department at Bank of Tokyo-Mitsubishi UFJ, a unit of Japan's largest publicly traded bank by assets.

The dollar traded at $1.4855 per euro and 1.1018 against the Swiss franc. The U.S. currency dropped to a record low of $1.4870 per euro yesterday and earlier touched 1.1015 versus the franc.

The dollar has declined 11 percent this year against the euro as the Fed's two rate cuts since September to 4.5 percent reduced the allure of U.S. assets. The U.S. Dollar Index traded on ICE Futures U.S. in New York touched a record low of 74.944 yesterday, the weakest since the gauge started trading in 1973.

Fed Rate Cuts

The odds of the Fed cutting rates a quarter-percentage point to 4.25 percent on Dec. 11 were 90 percent, up from 68 percent a month ago, futures contracts traded on the Chicago Board of Trade show.

Reports yesterday showed the Reuters/University of Michigan's final consumer sentiment index for November fell to 76.1, while the New York-based Conference Board's index of leading U.S. economic indicators slid 0.5 percent in October.

The yield advantage of U.S. two-year Treasuries over similar-maturity Japanese government debt shrank to 2.26 percentage points today, the narrowest since 2004, making U.S. assets less attractive to international investors. The two-year German bund widened its yield advantage over comparable-maturity Treasuries to 65 basis points, the widest since 2004.

Gains in the yen may be limited by speculation importers will take advantage of its gains to buy foreign currencies.

`Good Opportunity'

``This level is a good opportunity for Japanese importers to buy the dollar against the yen,'' said Tokyo-Mitsubishi UFJ's Takami. ``They will take advantage of the yen's rally.''

Japan's currency may fall to 109.50 a dollar today, Takami forecast.

The yen has advanced against all 16 of the most-actively traded currencies this month as investors reduced holdings of carry trades. In that time, Australia's dollar declined 12 percent, New Zealand's currency weakened 8.6 percent while South Africa's rand lost 11 percent.

In carry trades, investors borrow money in low-yielding economies such as Japan and lend the funds in high-yielding countries to profit from the spread. The risk is that currency moves wipe out earnings. When the trade weakens, traders sell high-yielding assets and buy yen to repay borrowings.

Volatility Declines

One-month implied volatility for the yen fell to 14.75 percent today, down from 14.98 percent yesterday. Implied volatility on one-month euro-dollar options also slid to 17 percent from 18 percent yesterday.

The benchmark interest rate in Australia is 6.75 percent while New Zealand's is 8.25 percent. Japan's borrowing cost is 0.5 percent while Switzerland's is 2.75 percent.

``People are worried about a slowdown in global growth and they are running away from risky assets, giving a boost to the yen's strength,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research, part of MF Global Ltd., the world's largest broker of exchange-traded futures and options contacts. ``The fear is that we may see a few more shoes drop.''

The cost of borrowing in dollars for three months rose to the highest in four weeks yesterday, said the British Bankers' Association. U.S., European and Asian stocks sank. The Standard & Poor's 500 Index fell 1.6 percent, erasing its gain this year.

The spread, or extra yield, investors demand to own emerging-market dollar bonds instead of Treasuries widened to 2.6 percentage points yesterday, the most since 2005, according to JPMorgan Chase & Co.'s EMBI Plus index.