Yen Falls Most in Two Weeks Against Euro After Stocks Gain

By Lukanyo Mnyanda and Ron Harui

Oct. 28 (Bloomberg) -- The yen fell the most in two weeks against the euro and dropped for the first time in six days versus the dollar as rebounding stocks boosted confidence and led to purchases of higher-yielding assets funded in Japan.

The yen also declined on speculation Japan's central bank will sell the currency for the first time since March 2004 to help exporters. Japanese Finance Minister Shoichi Nakagawa said yesterday the government is ready to act if needed to halt gains in the yen, which earlier traded near a 13-year high against the dollar and at its strongest since May 2002 versus the euro.

``It's all about what's happening in stocks and that's giving us the impetus to unwind some of the risk-aversion trades,'' said Jeremy Stretch, a senior currency strategist in London at Rabobank International, the third-largest Dutch bank. ``Intervention is a real risk.''

Japan's currency slid 2 percent to 118.21 per euro at 10:03 a.m. in London, the most since Oct. 13, from 115.92 yesterday in New York, when it touched 113.64, the strongest level in more than six years. The yen fell to 94.66 per dollar, from 92.78. It reached 90.93 on Oct. 24, the highest since August 1995. The euro was little changed at $1.2488. It earlier traded as low as $1.2330, the weakest since April 2006.

The yen typically falls when demand rises for so-called carry trades, where investors borrow in currencies with low interest rates and buy assets in nations with higher rates. Japan's benchmark interest rate of 0.5 percent compares with 3.75 percent in Europe and 6 percent in Australia.

The British pound climbed 0.4 percent to $1.5611. It touched $1.5269 on Oct. 24, the lowest since August 2002. The Australian dollar rose 2.7 percent to 61.76 U.S. cents from 60.13 cents in New York yesterday.

Possible Intervention

Japan's Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo today that abrupt increases in currency volatility are undesirable. The yen has appreciated this month against all of some 170 global currencies tracked by Bloomberg, eroding Japanese exporters' overseas income.

Honda Motor Co., Japan's second-largest automaker, today cut its operating profit forecast for the financial year ending March by 13 percent to 550 billion yen ($5.8 billion). The new estimate was based on an exchange rate of 100 per dollar and every 1 yen gain against the greenback reduces annual operating profit by 20 billion yen.

``There's a little bit of concern over intervention,'' said Sharada Selvanathan, a currency strategist at BNP Paribas SA in Hong Kong. ``The market doesn't want to be too long yen for now because the Japanese have clearly suggested that if the yen strengthens they might consider coming into the market.''

Stocks Rebound

The yen has jumped 31 percent versus the euro and 51 percent against the Australian dollar in the past month on speculation investors will unwind carry trades.

The allure of carry trades dimmed in recent weeks as the global credit crisis led to increased currency volatility and fanned a stocks rout that's erased more than $12 trillion of market value this month alone.

Japan's Nikkei 225 Stock Average rebounded from the lowest level in 26 years today and Hong Kong's Hang Seng Index surged 14 percent, snapping a five-day losing streak that drove the benchmark down 28 percent. Europe's Dow Jones Stoxx 600 Index advanced 2.5 percent.

Gains in the common European currency may be limited after European Central Bank President Jean-Claude Trichet said yesterday he may cut interest rates next week. Europe's economy is on the brink of a recession, with the region's manufacturing and services industries contracting at a record pace in October and German business confidence dropping to a five-year low.

European Rate Cuts

``Worries over Europe's economy are heightening and Trichet has signaled lower rates,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. ``The bias for the euro is down.'' The euro may weaken to $1.22 this week, he forecast.

Investors are betting the ECB will lower borrowing costs further by June after cutting the main refinancing rate by a half point to 3.75 percent on Oct. 8. The implied yield on the three-month Euribor contract expiring in June was 3.06 percent today from 3.23 percent a week ago.

The Euribor contract has averaged around 44 basis points, or 0.44 percentage point, more than the ECB's overnight target during the past two years, Bloomberg data show.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

Last Updated: October 28, 2008 06:05 EDT