Yen Rises; U.S. Slowdown Spurs Sales of Higher-Yielding Assets

By Stanley White and Kosuke Goto

Jan. 29 (Bloomberg) -- The yen rose against all of the world's 16 most-actively traded currencies on speculation a U.S. economic slump will prompt investors to cut holdings of higher- yielding assets.

The yen advanced the most against the Australian and New Zealand dollars before a U.S. report forecast by economists to show that consumer confidence fell to a two-year low, a day after data showed slumping home sales. Japan's benchmark rate of 0.5 percent compares with 6.75 percent in Australia and 4 percent in Canada.

``Buying back of the yen may continue,'' said Toru Tokoyoda, head of foreign exchange sales in Tokyo at Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm by market value. ``U.S. housing inventories are going to build up whether or not the Fed cuts rates. There's going to be pain ahead.''

The yen rose to 106.60 against the dollar at 1:23 p.m. in Tokyo from 106.90 late yesterday in New York. It may rise to 106.10 today, Tokoyoda forecast. The currency climbed to 157.47 versus the euro from 158.02. It advanced 0.6 percent to 94.48 to Australia's dollar, and climbed 0.5 percent to 82.66 versus New Zealand's dollar.

The dollar also fell against the yen before a Federal Reserve meeting where the central bank may cut its target lending rate tomorrow by a half-percentage point, making U.S. assets less attractive to international investors. The euro bought $1.4762 from $1.4781, the British pound traded at $1.9827 from $1.9843 and the Swiss franc was little changed at 1.0894.

Dollar Falls

``Bad housing data will force the Fed to lower rates,'' said Satoshi Tate, a senior currency dealer in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded bank by assets. ``This will push down U.S. yields further, prompting dollar sales.''

The U.S. currency may fall to $1.4980 against the euro, Tate said.

China's yuan traded at 7.1972, close to the highest since a link to the dollar was scrapped in July 2005 as the nation strives to bring down inflation. The currency may rise more than 10 percent this year against the dollar, allowing Japanese policy makers to accept further gains in the yen, said Eisuke Sakakibara, Japan's former top currency official.

``Chinese authorities now recognize that they need to appreciate their currency quite significantly for their own sake,'' Sakakibara, 66, currently a professor at Tokyo's Waseda University, said in an interview with Bloomberg Television.

The yuan has strengthened 1.4 percent this year, on course for the biggest monthly advance since the end of a dollar peg in July 2005 as the government seeks to curb inflation. The Group of Seven industrialized nations have called on China to stop keeping the yuan artificially weak to support exports.

Substantial Move

``The Chinese now recognize that they can live with a rapidly appreciating yuan and, as a result, they're letting the yuan appreciate more each day,'' said Martin Feldstein, Harvard University economist and head of the National Bureau of Economic Research in Cambridge, Massachusetts.

Futures contracts on the Chicago Board of Trade show 100 percent odds the Fed will cut its 3.5 percent target rate for overnight lending between banks by as much as a half-percentage point tomorrow. An index of U.S. consumer confidence fell to 87 in January from 88.6 the prior month, according to an economist survey by Bloomberg News, before a report due at 10 a.m. New York time.

``The dollar will be sold,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Co. in Tokyo. ``The Federal Reserve has no other choice but to lower rates. Otherwise, it would cause the dismantling of the world's capitalist system.''

ECB Outlook

German two-year government bonds yield 1.24 percentage points more than similar-maturity U.S. Treasuries, which offered a premium over the European nation's debt before the Fed started cutting rates last year.

The euro may strengthen on speculation European Central Bank council member John Hurley will reiterate concern that inflation may accelerate in a speech in Dublin tomorrow.

Europe's single currency may gain for a second day against the dollar and the yen as traders increased bets that the ECB will lift borrowing costs from 4 percent. The implied yield on the June Euribor interest-rate futures contract, a gauge of the outlook for monetary policy, rose to 4.025 percent today from 4.015 percent yesterday.

``The ECB is still hawkish, signaling there's no intention at all of lowering rates,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``As U.S. rates will probably be lowered, the euro will likely be bought.''

The euro may advance to $1.4825 and 158.65 yen today, Soma forecast.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net ; Kosuke Goto in Tokyo at kgoto2@bloomberg.net .

Source : Bloomberg