By Stanley White and Ron Harui
Oct. 10 (Bloomberg) -- The yen rose against the dollar, headed for its biggest weekly gain in a decade, on speculation a global stock-market rout will prompt investors to pare holdings of higher-yielding assets funded with the Japanese currency.
The yen was on course for its largest weekly gain versus the euro as the Dow Jones Industrial Average and Nikkei 225 Stock Average both fell below 9,000 for the first time since 2003 on signs that carmakers will be the next victims of the credit crisis. Group of Seven finance ministers and central bankers meet today and tomorrow in Washington to discuss financial turmoil that has already led to interest-rate cuts and bank bailouts in most of the member nations.
``The basic trend is to buy the yen,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan's largest brokerage. ``The credit crunch is spreading from the financial sector to other companies, meaning currency traders can't take on risk. The G-7 may not be able to repair money markets quickly enough.''
The yen rose to 99.19 per dollar at 10:35 a.m. in Tokyo from 99.82 late yesterday in New York, up 6.2 percent this week. It touched 97.92, the strongest since March 19. Japan's currency was at 134.55 versus the euro from 145.11 on Oct. 3, heading for the largest weekly gain since the single currency's creation in 1999. It reached 132.83, the strongest since July 2005.
The euro fell to $1.3566 from $1.3604, on course for its second weekly decline. The yen may rise to 98 per dollar today, Amikura said.
Against the Australian dollar, the yen traded at 65.96, on course for a 24 percent gain this week. The yen soared by 18 percent against the New Zealand dollar this week to 59.19.
MAS Policy
The Singapore dollar fell to S$1.4750 against the greenback from S$1.4686 after the Monetary Authority of Singapore ended a policy favoring gains in its currency as the economy slows.
The Nikkei 225 Stock Average tumbled as much as 11 percent and the Dow plunged 7.3 percent yesterday. General Motors Corp. slumped to a 58-year low as the credit crisis reduced potential car buyers' access to loans.
``It's an absolute panic in stocks,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. ``The market wants to see action. Bad assets need to be taken off balance sheets, new capital needs to be added and then we might, maybe, get a respite.''
Carry Trades
The yen has surged 27 percent versus the Australian dollar, 20 percent against New Zealand's currency and 11 percent against the euro this month as investors pared so-called carry trades, in which investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. Japan's benchmark rate is 0.5 percent, compared with 6 percent in Australia and 7.5 percent in New Zealand.
``As global financial stability risks remain acute and questions are mounting about the follow-on effects to global growth prospects, this keeps deleveraging and risk retrenchment on center stage,'' wrote Ron Leven, currency strategist at Morgan Stanley in New York, in a research note yesterday. ``We are short dollar-yen, euro-yen and pound-yen.'' A short is a bet a currency will fall.
Risk Reversals
The dollar's one-month 25-delta risk-reversal rate against the yen was minus 6.8 percent today, the most since March 17, signaling traders demand a greater premium for yen calls, which allow for purchases, over puts, which grant the right to sell.
Coordinated interest-rate reductions by major central banks on Oct. 8 failed to revive lending among banks. The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent yesterday, the highest level since Dec. 28.
U.S. Treasury Secretary Henry Paulson and top aides are still considering options on how to proceed with a $700 billion bank bailout plan, including having the government acquire preferred stock, two officials informed of the matter said. Paulson and Federal Reserve Chairman Ben S. Bernanke will meet with their counterparts from the G-7 group, which comprises Canada, France, Germany, Italy, the U.K., the U.S. and Japan.
The dollar touched a 14-month high of $1.3444 per euro on Oct. 6 as the freeze in credit markets and global stock losses boosted demand for U.S. Treasuries. Banks' reluctance to lend to each other also caused a shortage of dollars for funding, accelerating the currency's gain.
Currency Reserves
Japanese Finance Minister Shoichi Nakagawa will propose at the G-7 meeting that the International Monetary Fund establish a lending program to help emerging countries deal with the financial crisis, the Nikkei newspaper reported today, without citing anyone. The program would be funded with foreign exchange reserves from Japan, China, Middle Eastern and developed countries, the newspaper said.
The dollar accounted for 63.9 percent of total reserves held by governments and central banks at the end of 2007, according to IMF data. China and Japan are the two biggest holders of Treasuries.
``I can't imagine the U.S. would agree to such a plan,'' said Osamu Takashima, chief analyst for global market sales and trading in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly listed lender. ``This could threaten demand for Treasuries at a time when the U.S. needs to borrow money for its bank bailout. This is also a negative for the dollar.''
European Rates
The euro headed for a third weekly loss against the dollar and a second versus the yen on speculation the credit crisis in Europe will deepen, prompting the European Central Bank to cut interest rates.
The currency has fallen 6.8 percent versus the yen this week, the most since the euro's debut in 1999, as central banks around the world were forced to lower borrowing costs this week after the seizure in credit markets stoked concern banks will run short of money. ECB policy makers said yesterday they expect the region's economic growth will remain weak for some time.
``Right now, financial institutions in Europe appear to be in trouble,'' said Hiroshi Yoshida, a foreign-exchange trader in Tokyo at Shinkin Central Bank, Japan's fifth-largest publicly traded lender by assets. ``The ECB may reduce rates further. The euro is likely to retest the downside.''
The Federal Reserve and the ECB on Oct. 8 led a global round of rate cuts, lowering their benchmarks by half a point to 1.5 percent and 3.75 percent respectively.
``We have to expect very weak growth for at least several quarters,'' Executive Board member Juergen Stark told Germany's Stuttgarter Zeitung in an interview published yesterday.
Traders are betting the ECB will lower its main refinancing rate by year-end. The implied yield on the December Euribor futures contract dropped to 4.40 percent today from 4.46 percent yesterday and from 4.77 percent on Oct. 3.
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.netRon Harui in Singapore at rharui@bloomberg.net
Last Updated: October 9, 2008 22:27 EDT
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