Yen Climbs, Nearing Record High Versus Pound, on Risk Aversion

By Ron Harui

Jan. 23 (Bloomberg) -- The yen rose toward a record high against the British pound and traded near the strongest level since 1995 versus the dollar as concern the global slowdown will worsen spurred investors to take refuge in Japan’s currency.

Sterling fell toward a 23-year low versus the dollar and declined to near the weakest in two weeks against the euro before a U.K. report that may show Britain’s economy shrank in the fourth quarter by the most since 1990. The euro headed for a fourth weekly loss against the dollar before a European report that economists say will show manufacturing and service industries contracted for an eighth month in January.

“The U.K. and the eurozone seem to be the worst off among the major economies,” said Satoshi Tate, a senior vice president in the foreign-exchange division in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest publicly traded bank. “Risk aversion is still prominent among some investors, so the yen is likely to remain a haven currency.” 

Japan’s currency climbed to 122.70 per pound as of 11:40 a.m. in Tokyo, after advancing to a record 119.42 on Jan. 21. The yen was little changed at 88.89 versus the dollar following a rally to 87.13 on Jan. 21, the strongest level since July 1995. The yen advanced to 115.38 per euro after appreciating to 112.12 on Jan. 21, the highest since March 2002.

The pound dropped to $1.3803 from $1.3877 in New York yesterday, after falling to $1.3622 on Jan. 21, the weakest since 1985. Against the pound, the euro rose to 94.03 pence from 93.70 pence yesterday, when it reached 94.67 pence, the strongest since Jan. 5. The euro declined to $1.2981, after sliding to $1.2825 on Jan. 21, the lowest in six weeks.

Stronger Yen 

The yen has strengthened against all of the 16 most-active currencies this week, rising 5.5 percent to 46.97 against New Zealand’s dollar and 4.9 percent to 58.22 versus Australia’s dollar. Investors tend to purchase the yen in times of market turmoil because Japan has a current-account surplus and volatility deters so-called carry trades.

“The Swiss franc, the yen, the Swedish krona and the Norwegian krone are the currencies with the strongest current- account balances, while the weakest balances are found in the New Zealand dollar, the Australian dollar, the U.S. dollar and the pound,” Henrik Gullberg, a London-based currency strategist at Deutsche Bank AG, wrote in a research note yesterday.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates. Japan’s benchmark interest rate of 0.1 percent compares with 4.25 percent in Australia and 5 percent in New Zealand.

Growing Risk 

Implied volatility on one-month pound-yen options was little changed at 34.61 percent today. Higher volatility would suggest a greater risk of exchange-rate fluctuations that can make carry trades unprofitable.
The British currency lost 6.3 percent versus the dollar and 4.3 percent against the euro this week as the U.K. government’s plan for a second bank bailout in three months raised concern that the financial crisis is worsening and the budget deficit is widening.

“The pound looks set to weaken further as risks surrounding the U.K. continue to ratchet higher,” Ned Rumpeltin, a London-based currency strategist at Morgan Stanley, wrote in a research note yesterday. “Concerns center on whether the country can attract the capital from external investors to finance its burgeoning fiscal deficit.”

Morgan Stanley forecasts the pound will weaken to $1.30 against the dollar and to parity with the euro by the end of June, according to the note. 

Weaker Euro 

The U.K. currency is poised for an 8.3 percent decline this week versus the yen, the largest loss in three months. Britain’s gross domestic product may have contracted 1.2 percent in the fourth quarter from the previous three months, according to a Bloomberg News survey of economists before today’s report from the Office for National Statistics.

U.K. retail sales declined 0.7 percent in December from the previous month, a separate Bloomberg survey shows. The data are due at 9:30 a.m. in London.

The euro headed for a third weekly loss versus the yen as a composite index of Europe’s manufacturing and service industries fell to a record-low 37.4 this month, according to a Bloomberg News survey of economists. The index, which is based on a survey of purchasing managers by Markit Economics, will be released at 9 a.m. in London. A reading below 50 indicates contraction.
“The risk is high that tonight’s eurozone and U.K. data, especially the retail sales report, will surprise to the downside,” said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. “Selling pressure on the euro and the pound versus the yen is likely to persist.” 


To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: January 22, 2009 22:02 EST