Yen Falls as Stock Gains Spur Buying of Higher-Yielding Assets

By Stanley White

Dec. 10 (Bloomberg) -- The yen fell against the euro after Asian stocks extended gains to a fourth day, encouraging investors to increase holdings of higher-yielding assets funded with loans in Japan.

The yen also declined versus the dollar and British pound after Congressional Democrats and President George W. Bush’s administration agreed on the outlines of a $15 billion plan to give General Motors Corp. and Chrysler LLC federal loans to stay in business. The South Korean won rose for a fourth day on speculation overseas investors bought the country’s shares.

“The yen’s bias is to weaken,” said Tetsu Aikawa, deputy general manager of the capital markets division at Shinsei Bank Ltd. in Tokyo. “Stock markets are showing signs of stability, and that will encourage investors to take on risk. Negotiations on bridge financing for U.S. car manufacturers seem to be heading in the right direction.”

Japan’s currency dropped to 119.68 per euro as of 12:50 p.m. in Tokyo from 119.07 late yesterday in New York. Against the dollar, it declined to 92.46 from 92.13. It rose to 91.60 on Dec. 5, the highest since Oct. 24. The euro was little changed at $1.2944. The yen may weaken to 93 per dollar and 120.50 against the euro today, Aikawa said.

Against the British pound, the yen fell to 136.52 from 135.87. It also declined to 9.0641 per South African rand from 9.0401. In carry trades investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.3 percent target interest rate is the lowest among developed nations and compares with 1 percent in the U.S., 2.5 percent in Europe, 2 percent in the U.K. and 12 percent in South Africa.

Stocks Rise

The MSCI Asia-Pacific index of regional shares rose 1.6 percent as South Korea’s Hynix Semiconductor Inc., the world’s second-largest computer memory chipmaker, won financial support from creditors.

The Korean won climbed 1.7 percent to 1,423.65 per dollar as the Kospi stock index added 2.5 percent, a fourth day of gains.

U.S. lawmakers and the White House agreed to auto legislation “in concept,” a senior administration official said yesterday. The bill would include protection for taxpayers’ money, including the appointment of a so-called car czar who could force the companies into bankruptcy if they don’t come up with their own restructuring plans by March 31, the official told reporters on condition of anonymity.

The yen has gained this year against all 178 currencies tracked by Bloomberg on speculation the global economic slump and interest-rate cuts will prompt investors to unwind carry trades.

Annual Gain

Japan’s currency appreciated 21 percent versus the dollar, 36 percent against the euro and 70 percent versus New Zealand’s dollar this year. It’s headed for the first annual gain versus Brazil’s real, the euro and the New Zealand dollar in at least six years.

“Deleveraging is not fully done in the financial industry,” said Benedikt Germanier, a currency strategist in Stamford, Connecticut, at UBS AG, who predicted the yen may appreciate to 90 per dollar in a month. “The yen still has buying potential.”

Implied volatility on one-month dollar-yen options was at 20.30 percent, up from 11.45 percent at the end of last year, indicating investors expect more currency fluctuations. Volatility jumped to 41.79 percent on Oct. 24, the highest level since Bloomberg started compiling the data in 1995.

Exporter Earnings

The stronger yen has eroded Japanese exporters’ revenue. Sony Corp., the world’s second-biggest consumer-electronics maker, said yesterday it plans to eliminate 16,000 jobs. It said on Oct. 23 that net income will probably drop 59 percent in the year ending March 31.

The dollar has gained 34 percent versus the pound this year and 13 percent against the euro as the credit-market seizure and $980 billion of losses on mortgage-related securities worldwide led investors to repatriate overseas investment to the U.S. and seek shelter in Treasuries.

Demand for U.S. government debt pushed the yield on the 10- year note to 2.65 percent yesterday. It reached 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Federal Reserve’s daily records began.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, was little changed at 85.791 today. It touched 88.463 on Nov. 21, the highest since April 2006.

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

Last Updated: December 9, 2008 22:53 EST