Yen Falls as Stock Gains Spur Investors to Seek Higher Yields
The yen fell against the 16 most-
active currencies as European stocks rose and Asias benchmark
equity index advanced to a three-week high, prompting investors
to purchase higher-yielding assets funded in Japan.
The yen dropped the most versus the U.K. pound, a favorite
for so-called carry trades, before a U.S. government report on
factory orders that may show business spending is holding up in
the worlds biggest economy. The euro also advanced before the
European Central Banks policy meeting this week, when its
forecast to keep borrowing costs at a six-year high.
“Were getting a re-establishment of risk and thats giving
support to the high yielders at the expense of low-yielding
currencies like the yen, said Adam Cole, London-based head of
currency strategy at Royal Bank of Canada, the countrys biggest
lender. “The markets will continue to take their cue from the
stock markets.
The yen declined to 158.48 per euro as of 7:01 a.m. in New
York, from 157.67 late on Feb. 1. It was at 106.96 versus the
dollar from 106.95. Cole predicted the Japanese currency may fall
to 110 by the end of March.
The yen dropped the most since Jan. 24 against the pound,
falling as much as 1.2 percent to 211.76. Gains in the British
currency, which rose today against all 16 of its major
counterparts, may be limited before the Bank of Englands policy
decision on Feb. 7. Economists surveyed by Bloomberg News expect
it to cut its benchmark rate a quarter-point to 5.25 percent.
The euro was at $1.4816, retreating from an earlier high of
$1.4849, from $1.4802 on Feb. 1. It rose to near the all-time
high of $1.4967 on Nov. 23 at the end of last week. The dollar
was little changed at 1.0906 Swiss francs. It climbed 0.4 percent
to 99.91 Canadian cents.
Aussie Buoyant
The Australian dollar, also known as the aussie, rose to a
three-week high against the yen, climbing 0.8 percent to 97.02,
and to a 2 1/2 month high against the dollar, gaining 0.3 percent
to 90.73 U.S. cents. All 27 economists surveyed by Bloomberg
forecast the Australian central bank will raise its benchmark
rate a quarter-point to 7 percent tomorrow.
In carry trades, speculators get funds in a country with low
borrowing costs such as Japan and invest in one with higher
returns, earning the spread between the two. Japans benchmark
rate is 0.5 percent, the lowest among industrialized nations.
Asian shares advanced, with the MSCI Asia Pacific Index
gaining 2 percent. The Dow Jones Stoxx 600 Index of European
shares climbed 0.9 percent.
ECB Rates
The euro strengthened as traders raised bets that the ECB
will increase borrowing costs this year. Inflation in Europe
accelerated to a 14-year high of 3.2 percent in January,
overshooting the ECBs 2 percent ceiling for a fifth month,
official data showed on Jan. 31.
ECB policy maker Klaus Liebscher said the central bank will
do what is needed to prevent a price-wage spiral from boosting
inflation, according to a statement published by the Austrian
central bank today.
The ECB will leave its benchmark interest rate at 4 percent
on Feb. 7, all 55 economists surveyed by Bloomberg forecast.
Interest-rate futures show the implied rate on the March Euribor
contract rose to 4.34 percent from 4.30 percent on Feb. 1.
Gains in the euro were limited as the worlds biggest
currency traders predicted the Federal Reserves decision to
lower interest rates 1.25 percentage points last month will end
the dollars two-year slide.
Focus on Growth
For the first time since 2003, investors are focused on
relative growth prospects rather than absolute borrowing costs,
said Geoffrey Yu, a London-based strategist with UBS AG, the No.
2 currency trader. The steepest cuts in rates in seven years will
support expansion in the U.S. as Europe slows, said BNP Paribas
SA, the most accurate forecaster Bloomberg tracks. The dollar
will gain at least 9 percent against the euro this year, UBS and
BNP predict.
The U.S. Commerce Department will say today that factory
orders gained 2.5 percent in December, after a 1.5 percent
increase the prior month, according to a Bloomberg survey of
economists.
The euro may fall to $1.47 against the dollar this week as
its chart is set to form a so-called triple top, said Kenichiro
Fujita, manager of derivatives-marketing in Tokyo at Aozora Bank
Ltd., Japans ninth-largest publicly traded lender by assets.
A triple top forms when an exchange rate rises, falls and
then climbs back to the earlier price. The euro advanced to a
record of $1.4967 on Nov. 23, with subsequent peaks at $1.4922 on
Jan. 15 and $1.4949 on Feb. 1. The pattern indicates a currency
may decline after it has had three consecutive peaks.
Euro `Fatigue
“There are feelings of fatigue after the euro failed to
break through a record high last week, Fujita said.
Japans currency also fell after figures from the
Washington-based Commodity Futures Trading Commission last week
showed traders increased bets that the yen will rise. The data
are sometimes used as a contrary indicator because the reversal
of such positions can cause large currency swings.
The difference in the number of wagers by hedge funds and
other large speculators on an advance in the yen compared with
those on a drop — so-called net longs — was 52,928 on Jan. 29,
the most since February 2004, the Commissions data showed.
All 19 economists surveyed by Bloomberg expect the BOJ will
leave its benchmark interest rate unchanged on Feb. 15.
One-month implied volatility for the yen against the dollar
declined to 11.65 percent from 12.25 percent on Feb. 1. Dealers
quote implied volatility, a gauge of expectations for currency
moves, as part of pricing options. Lower price swings limit the
threat to profits earned on carry trades.
Declines by the yen may be limited by speculation continuing
losses by financial services companies will prompt investors to
reduce holdings of higher-yielding assets, said Gavin Friend,
head of currency strategy at Commerzbank AG, Germanys second-
biggest bank.
“The next few months is going to be a tough time for
equities and that should support low-yielding currencies like the
yen and Swiss franc, London-based Friend said in an interview
with Bloomberg Television.
