Yen Set for Weekly Decline as Higher-Yielding Currencies Rally

By Agnes Lovasz and Ron Harui

Jan. 25 (Bloomberg) -- The yen is set to fall against the world's 16 most-active currencies after a rally in global stocks encouraged investors to purchase higher-yielding assets funded with loans made in Japan.

The currency fell the most versus the New Zealand dollar as confidence among traders to resume so-called carry trades revived. The dollar traded near a one-week low versus the euro as investors sought higher returns outside the U.S. on speculation the Federal Reserve will cut rates on Jan. 30, after this week's 75 basis-point emergency reduction to 3.5 percent.

``Risk appetite is recovering and equity markets are gaining, which is supporting carry trades,'' said Niels From, a currency strategist in Frankfurt at Dresdner Kleinwort, who expects the yen to rebound in the coming three months. ``Dollar- based investors are going back into the global market and this is putting the dollar under pressure.''

The yen fell to 159.13 per euro, near the lowest since Jan. 15, before trading at 158.51 at 11:22 a.m. in London from 156.20 a week ago. It dropped to 107.62 per dollar, from 107.18 yesterday and from 106.87 on Jan. 18.

From predicts the yen will rise to 103 per dollar and to 155 versus the euro by March as the economic outlook deteriorates and investors become more risk averse, while the euro will rise to $1.50.

Japan's currency declined to 83.02 against the New Zealand dollar, from 81.22 a week ago, and fell to 107.08 versus Canada's dollar from 104.03. It slipped to 15.19 per South African rand from 15.16. Global stocks advanced for a third day, with the MSCI World Index gaining 1 percent today, leaving it 1.2 percent higher on the week.

Interest-Rate Bets

Traders see a 100 percent chance the Fed will cut its target for the overnight lending rate by at least a quarter-point at its Jan. 30 meeting, futures on the Chicago Board of Trade show. There's a 76 percent likelihood of a half-point reduction.

UBS AG, the world's second-largest currency trader, yesterday predicted that the U.S. will slide into recession in the first half of 2008. Some foreign-exchange strategists including Ian Stannard at BNP Paribas SA in London also forecast a worsening economic outlook and recommend buying low-yielding currencies such as the yen and the Swiss franc.

``I'm skeptical about the sustainability of the rebound in the yen crosses,'' Stannard said. ``We're likely to see risk appetite continuing to be squeezed.'' He said investors should sell the dollar against the yen when it strengthens to 108 yen.

Citigroup Forecast

The dollar may fall at least 5.6 percent against the yen as the extra yield two-year Treasuries pay over similar-maturity Japanese government debt shrinks, analysts at Citigroup Global Markets Inc. said.

``The main driver of the dollar-yen remains U.S. yields,'' analysts led by New York-based global head of currency strategy Tom Fitzpatrick wrote in a research note yesterday, recommending that clients ``sell the bounce.''

The yield spread between two-year U.S. and Japanese notes narrowed to 1.74 percentage points today from 3.86 percentage points six months ago. The correlation between dollar-yen and the two-year spread in the period was 0.9, according to Bloomberg calculations. A correlation of 1 means they move in lockstep.

The dollar may weaken to so-called support between 101.25 yen and 101.67 yen, near lows reached in January 2005, the analysts wrote. Support is a level where buy orders may be clustered.

The dollar was at $1.4723 per euro, from $1.4621 on Jan. 18. It reached $1.4779 yesterday, the weakest since Jan. 16. The currency fell to $1.9785 against the pound, from $1.9554 a week ago, and traded at 1.0955 versus the Swiss franc from 1.0983.

European Slowdown

The euro may fall to $1.44 against the dollar and 153 yen by March 31 as a U.S. slowdown depresses the European economy, forcing the European Central Bank to cut interest rates, according to Daiwa Institute of Research.

``The slowdown in the U.S. economy is spreading to the European economy,'' said Yuji Kameoka, a senior economist and currency analyst at the unit of Japan's second-largest brokerage. ``The ECB will be forced to cut rates in the second quarter, buffeting the euro.''

The euro rose yesterday after ECB policy maker Axel Weber dismissed speculation of ECB interest-rate reductions this year as ``wishful thinking.'' German business confidence unexpectedly rose in January, an Ifo research institute report showed, strengthening the case to leave the benchmark interest rate at 4 percent, a six-year high.

Default Risk

The risk of companies and governments in Asia defaulting on their debt fell this week on speculation the two biggest bond insurers, MBIA Inc. and Ambac Financial Group Inc., may be able to avert credit ratings downgrades. U.S. President George W. Bush and lawmakers reached an agreement to give rebate checks to 117 million families yesterday.

Malaysia's ringgit and Singapore's dollar rose to decade highs against the U.S. currency as the stimulus plan revived confidence in global economic growth. The ringgit reached 3.2375, the strongest since November 1997, and the Singapore dollar touched S$1.4206, the highest since June 1997.

The yen was little changed after Japan's consumer prices excluding fresh food climbed 0.8 percent last month from a year earlier, double November's increase.

The Bank of Japan kept its benchmark rate unchanged at 0.5 percent this week. It left rates on hold last month because of market ``instability'' and increasing risk the U.S. slowdown will intensify, minutes of the Dec. 19-20 meeting issued today showed. The Brazilian and New Zealand central banks held their lending rates at 11.25 percent and 8.25 percent this week.

``Upward inflation numbers may not affect the BOJ's rate policy so much,'' said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. in Tokyo, a unit of Japan's third- biggest publicly traded lender. ``The central bank's main focus is now on overseas economies such as the U.S. Stronger inflation is also bad for consumer sentiment.''

Japan's currency may move between 100 and 110 per dollar this quarter, she said.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net

Source : Bloomberg