By Kosuke Goto and Ron Harui
Nov. 22 (Bloomberg) -- The yen retreated from the highest in more than two years against the dollar on speculation Japanese importers are selling the currency to take advantage of a five-month rally.
The currency also declined against the South African rand and the Australian dollar as Asian stocks pared losses, giving Japanese investors greater confidence to buy higher-yielding assets. The dollar set an all-time low against the euro for a third day as traders bet the Federal Reserve will cut interest rates to prevent subprime mortgage losses dragging the U.S. economy into recession.
``This level is a good opportunity for Japanese importers to buy the dollar against the yen,'' 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. ``They will take advantage of the yen's rally.''
Japan's currency fell to 108.77 per dollar at 7:11 a.m. in London after touching 108.26 yesterday, the strongest since June 2005. It dropped to 161.49 per euro from 161.13 late yesterday, when it reached 160.08. The yen may fall to 109.50 a dollar today, Takami forecast.
The yen has climbed 14 percent since reaching 124.13 per dollar on June 22, the lowest in 4 1/2 years, a gain that has surprised Japanese importers and exporters. The Bank of Japan's Tankan survey on Oct. 1 showed large manufacturers expected the yen to trade at an average of 114.33 against the dollar in the six months ending on March 31, 4.7 percent weaker than its current level.
Thanksgiving Holiday
The dollar traded at $1.4853 per euro and 1.1019 against the Swiss franc. The U.S. currency earlier dropped to a record low of $1.4873 per euro and earlier touched 1.1007 versus the franc. It may fall to $1.4900 per euro and 108 yen today, Muramatsu forecast.
Currency fluctuations may be exaggerated because U.S. markets are closed today for the Thanksgiving holiday, said Takami.
The Japanese yen weakened against all 16 of the most- actively traded currencies as investors returned to so-called carry trades. It fell to 15.9833 per rand from 15.8858 and to 95.07 per Australian dollar from 94.39. It weakened to 81.80 against New Zealand's dollar from 81.50 yesterday, when it touched 80.72, the highest since Sept. 18. The Nikkei 225 Stock Average rose 0.3 percent, erasing a loss of 1.1 percent.
``Japanese investors are selling the yen,'' said Kenichiro Fujita, manager of derivatives marketing group in Tokyo at Aozora Bank Ltd., Japan's eight-largest publicly traded lender by assets. ``They are riding on the back of reduced risk aversion in the markets.''
The yen may fall to 109.50 a dollar today, Fujita forecast.
Carry Trades
In carry trades, investors sell currencies in countries with low borrowing costs and buy assets in places with higher Interest rates, profiting from the difference between them. The risk is exchange-rate fluctuations erase those profits.
The U.S. currency weakened for a fifth day against the euro as Bank of Japan board member Seiji Nakamura said today that ``downside risks'' to U.S. economic growth are rising as the housing recession worsens. Losses from U.S. subprime mortgage foreclosures, coupled with slowing economic growth and falling house prices, could reach as much as $300 billion, the Organization for Economic Cooperation and Development said in a report released in Paris.
``The economy is doing badly because of subprime woes and the Fed is certain to cut rates in December,'' said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank, Germany's second-largest bank. ``The bias is for the dollar to weaken.''
Subprime Losses
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.
The yield advantage of U.S. two-year Treasuries over similar-maturity Japanese government debt shrank to 2.27 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 66 basis points, the widest since 2004.
The euro gained on speculation European Central Bank policy makers will today reiterate concern inflation will accelerate, adding to signs the central bank may need to resume raising interest rates.
Europe's single currency also rose against the yen after the yield premium investors earn on 10-year German bunds over similar-maturity Japanese government bonds increased to 2.60 percentage points today, the most in almost a week.
Yield Premium
``Traders want to take advantage of Europe's yield premium over Japan's,'' said Hideaki Inoue, chief manager of derivatives and fixed-income investment in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly traded bank by assets. ``There's buying of the euro and selling of the yen.''
The euro may strengthen to 163.00 yen and $1.49 today, Inoue forecast.
ECB President Jean-Claude Trichet will speak in Paris and governing council member Mario Draghi will speak in Frankfurt.
Investors raised bets the ECB will increase borrowing costs from 4 percent this year. The implied yield on the Euribor December futures contract was 4.60 percent, up from 4.575 percent a week earlier.
To contact the reporter on this story: Kosuke Goto in Tokyo at at kgoto2@bloomberg.net ; Ron Harui in Singapore at at rharui@bloomberg.net
Source: Bloomberg
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