Yen Rises on Concern a Global Recession Will Curb Carry Trades

Yen Rises on Concern a Global Recession Will Curb Carry Trades

The yen rose against the euro and the dollar as speculation a global recession will deepen prompted investors to pare holdings of higher-yielding assets funded in Japan.

By Ron Harui and Stanley White

Nov. 26 (Bloomberg) — The yen rose against the euro and the dollar as speculation a global recession will deepen prompted investors to pare holdings of higher-yielding assets funded in Japan.

The currency also gained versus the Australian dollar and the British pound on concern the Federal Reserve’s $800 billion plan to unfreeze credit markets will fail to prevent a protracted economic slump. The U.S. economy, the world’s biggest, shrank in the third quarter as consumer spending plunged the most in almost three decades, government data showed yesterday.

“The yen should remain supported,” said Osao Iizuka, head of foreign-exchange trading at Sumitomo Trust & Banking Co. in Tokyo. “There was a bounce in sentiment after the Fed’s announcement of its latest measures. This has faded because there are still a lot of problems to work out.”

The yen rose to 123.05 per euro as of 7:21 a.m. in London from 124.43 late yesterday in New York. It advanced to 94.84 versus the U.S. dollar from 95.22. The euro fell to $1.2977 from $1.3064. The pound declined to $1.5348 from $1.5472. The yen may rise to 94.80 per dollar today, Iizuka said.

Thailand’s baht slid as low as 35.35 per dollar, the weakest level since February 2007, as anti-government protesters stormed the main terminal at Bangkok’s international airport.

Australia’s dollar fell to 61.35 yen from 61.82 yen in New York late yesterday. The pound dropped 0.9 percent to 145.99 yen. Japan’s benchmark interest rate of 0.3 percent compares with 3 percent in the U.K. and 5.25 percent in Australia.

Higher Forecast

In a carry trade, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is currency market moves can erase those profits.

Bank of America Corp. raised its forecast for the yen against the dollar on expectations the Bank of Japan will delay cutting interest rates and Japanese investors may refrain from funneling funds into overseas assets offering higher returns.

“We have pushed back our BOJ rate-cut forecast from December to February and narrower interest-rate differentials should raise hurdles to Japanese investors’ foreign asset investment over the next several months,” said Tomoko Fujii, head of economics and strategy for Japan at Bank of America in Tokyo, confirming a research note dated yesterday. “We have revised down our dollar-yen forecasts over the next year.”

The yen will trade at 97 per dollar at year-end and 100 at the end of March, compared with previous forecasts of 101 and 105, respectively, Fujii said.

Fed Action

The Fed will buy as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the central bank said in statements yesterday in Washington.

The Organization for Economic Cooperation and Development cut its forecast for global growth in 2009. The economies of the organization’s 30 members will contract 0.4 percent next year, after expanding 1.4 percent this year. Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July through September, the most since the 2001 recession, according to revised figures from the Commerce Department in Washington. more

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