Yen Rises on Speculation Stock Declines to Curb Carry Trades

By Stanley White and Ron Harui

Sept. 9 (Bloomberg) -- The yen rose against the euro for a second day on speculation credit-market losses will widen, prompting investors to pare holdings of higher-yielding assets funded with Japan's currency.

The yen traded near two-year highs against the Australian and New Zealand dollars, two favorites of so-called carry trades, as Asian banking shares fell on speculation the U.S. government's takeover of mortgage lenders Fannie Mae and Freddie Mac won't halt subprime losses. Australia's currency slid after home-loan approvals unexpectedly declined for a sixth month.

``Concerns over the U.S. financial markets have not dissipated at all,'' said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe General SA, France's second- largest bank by market value. ``Equities also are declining. Investors are averse to taking on risk and are buying the yen.''

The yen rose to 151.34 versus the euro at 1:29 p.m. in Tokyo from 152.96 late yesterday in New York. Against the dollar, the yen gained to 107.42 from 108.28. The euro fell to $1.4047, the lowest since Oct. 9, and last traded at $1.4088 from $1.4128. The yen may advance to 107.50 against the dollar and 151.00 per euro today, Saito said.

The yen rose to 86.51 versus the Australian dollar from 89.04 late yesterday in Asia. It also advanced 2.8 percent to 71.18 per New Zealand dollar.

Stock Losses

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. Benchmark rates are 0.5 percent in Japan, 7 percent in Australia and 8 percent in New Zealand.

The MSCI Asia-Pacific Index of regional shares lost 1.9 percent. Wells Fargo & Co., the biggest bank on the U.S. West Coast, said yesterday it may have to write down most of its $480 million stakes in Fannie Mae and Freddie Mac. Lehman Brothers Holdings Inc. fell almost 13 percent yesterday after analysts at Merrill Lynch & Co. and Oppenheimer & Co. predicted larger writedowns.

The Australian dollar declined to 80.23 U.S. cents, the lowest since August 2007. Australian home-loan approvals fell 0.2 percent in July, compared with the median estimate in a Bloomberg News survey for no change.

The pound fell to $1.7543 from $1.7581 after the Royal Institution of Chartered Surveyors said U.K. home prices dropped in August as a squeeze on mortgage lending pushed sales to a record low. Britain's currency has fallen 25 of the past 28 days.

The dollar fell for the first time in three days against the yen on speculation U.S. consumer spending will falter as the housing market weakens. Treasury 10-year notes gained yesterday amid speculation the government's rescue of the mortgage financing firms won't reverse the U.S. economic slowdown.

U.S. Economy

Pending sales of previously owned U.S. homes fell 1.5 percent in July after rising 5.3 percent in the previous month, according to a Bloomberg News survey of economists before the National Association of Realtors releases the data at 10 a.m. in Washington.

U.S. retail sales excluding cars and trucks dropped 0.2 percent in August, the first decline since February, according to a separate survey, after a 0.4 percent gain in July. The Commerce Department will release the data on Sept. 12.

``You can't say it's all roses for the U.S. dollar,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``There's a very high chance it will continue to fall. The macroeconomic outlook is awful and that won't change anytime soon.''

The U.S. currency may decline to 107.40 yen today, he said.

Euro, Surplus

The euro declined for a ninth day against the dollar, its longest stretch since the currency's debut in 1999, before a German report that may show the nation's trade surplus shrank in July, adding to signs that Europe's largest economy is cooling.

Europe's single currency fell to an 11-month low on speculation slowing economic growth in the 15-nation region may prompt the European Central Bank to refrain from raising interest rates. The euro also dropped as the difference in yield between two-year German and U.S. government bonds decreased to 1.75 percentage points from 1.83 percentage points a week ago.

Narrowing Trade Surplus

``A narrowing in the trade surplus would be negative for growth because exports are not really improving,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``Sentiment for the euro is not good.''

The euro may weaken to $1.4050 and 150.00 yen today, Lee said.

Germany's trade surplus narrowed to 17.5 billion euros ($24.7 billion) in July from 19.7 billion euros in June, according to a Bloomberg News survey of economists. The Federal Statistics Office will release the data at 8 a.m. in Wiesbaden.

The odds the ECB will increase its 4.25 percent benchmark interest rate by a quarter-percentage point at its next meeting on Oct. 2 were 3.9 percent yesterday, according to a Credit Suisse Group index based on overnight swaps.

The euro is likely to ``test'' so-called support at $1.3840 against the dollar this week, said Pak Lai Ng, a technical analyst at Forecast Pte in Singapore, citing charts that predict price movements.

Support at $1.3840 is a 50 percent retracement of the euro's rise from the November 2005 low of $1.1640 to the all- time high of $1.6038 in July, based on a series of numbers known as the Fibonacci sequence. The $1.3840 level also represents an ascending trend line that began in February 2002, which is extrapolated out to today, Ng said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netRon Harui in Singapore at rharui@bloomberg.net