Yen Advances as Credit-Loss Concern Damps Carry-Trade Demand

By Gavin Finch and Stanley White

Aug. 19 (Bloomberg) -- The yen rose to a three-month high against the euro as declines in stocks and concern financial firms will post more losses damped demand for higher-yielding assets funded by loans in Japan.

The yen also advanced versus the dollar, New Zealand dollar and the British pound as Asian and European stocks tumbled after JPMorgan Chase & Co. analysts said Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, may post $4 billion of credit writedowns. The euro traded near its weakest level against the dollar in six months as crude oil prices declined for a fourth straight day.

``We're seeing the yen benefit from an element of risk aversion,'' said Jeremy Stretch, a senior strategist in London at Rabobank International, the third-largest Dutch bank. ``There's still some nervousness about residual financial-market weakness.''

The yen climbed 0.4 percent to 161.15 per euro at 7:55 a.m. in New York, from 161.82 yesterday, after touching 161.01, the strongest since May 13. It advanced 0.3 percent to 109.76 per dollar, from 110.13. The euro was at $1.4684, compared with $1.4694, after reaching $1.4631, the lowest since Feb. 20.

JPMorgan predicted Lehman may lose $3.30 a share in the third quarter, more than three times the average analyst estimate in a Bloomberg survey. Financial institutions have posted more than $500 billion of losses and writedowns since the start of last year, according to data compiled by Bloomberg.

The Japanese currency rose to 77.91 per New Zealand dollar, from 78.19, and advanced to 204.48 versus the British pound from 205.42.

Carry Trades

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates. The risk is that currency market moves erase those profits. Borrowing costs are 0.5 percent in Japan, 5 percent in the U.K. and 8 percent in New Zealand.

The MSCI Asia-Pacific Index of regional shares lost 1.9 percent today, while Europe's Dow Jones Stoxx 600 slid 1.5 percent. U.S. stock-index futures also declined.

Banks are being ``crushed by ballooning debts,'' said Tetsuhisa Hayashi, chief manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's largest lender by market value. ``Risk aversion among investors will cause further yen buying,'' driving the Japanese currency to 100 per dollar by year-end, Hayashi said.

BOJ Meeting

The Bank of Japan cut its economic assessment for a second straight month at a monetary policy meeting today, acknowledging that threats to growth outweigh decade-high inflation as its chief concern. The world's second-largest economy shrank last quarter, putting it on the brink of the first recession in six years.

The revised BOJ outlook ``will place even less pressure on the yen to appreciate in the middle to long term,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former BOJ currency trader, wrote in a research note today.

RBS pushed back its forecast for a BOJ rate increase to the fourth quarter of 2009 from the second quarter, Yamamoto said, confirming the contents of the report.

U.S. housing starts dropped to an annual rate of 960,000 in July, according to a survey by Bloomberg News before the Commerce Department's report today. The Labor Department will report that the producer-price index climbed 0.6 percent in July after increasing 1.8 percent the previous month, according to a separate survey.

Futures on the Chicago Board of Trade show a 25 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter- percentage point by its Dec. 16 meeting, down from 37 percent odds a week earlier. Policy makers next meet Sept. 16.

Crude oil for September delivery fell as much as $1.23 to $111.64 a barrel on the New York Mercantile Exchange.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net