Yen Gains to Near Record Versus Pound on Rising Credit Concerns

By Ron Harui and Lukanyo Mnyanda

Jan. 20 (Bloomberg) -- The yen rose to near a record high against the British pound on speculation widening credit-market losses will hurt corporate earnings, reducing demand for higher- yielding assets.

Japan’s currency gained for a second day versus the pound and climbed versus the euro on concern the U.K. government will have to take full control of Royal Bank of Scotland Group Plc after the bank yesterday forecast the biggest loss ever reported by a British company. The euro fell to a five-week low against the dollar before a German report today that economists say will show investor confidence fell for an 18th month in January.

“Investors are risk averse, given ongoing worries that credit losses will spread,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The markets are concerned whether the government can resolve this crisis. The bias is for the yen to be bought.”
The yen climbed to 129.28 per pound as of 9:51 a.m. in Tokyo from 130.71 late in London yesterday. It reached 128.84 on Jan. 13, a record high according to data compiled by Bloomberg. Japan’s currency rose to 117.66 per euro from 118.47 and advanced to 90.38 against the dollar from 90.64. Japan’s currency may gain to 90 per dollar today, Ishikawa said.

The euro declined to $1.3023 from $1.3069 late in London yesterday. It reached $1.3007, the weakest since Dec. 11. Europe’s single currency advanced to 91.00 pence from 90.59 pence. The pound fell to $1.4292 from $1.4420. It touched $1.4282, the lowest since April 2002.

Carry Trades 

Benchmark interest rates are 4.25 percent in Australia and 5 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher rates. The risk is that currency market moves erase those profits.
The U.K. currency declined for a third day against the euro and a second versus the dollar on speculation British Chancellor of the Exchequer Alistair Darling’s second bank rescue in three months won’t be sufficient to revive the recession-mired economy.

The pound weakened versus 15 of the 16 most-active currencies today after Darling said yesterday the government will extend a Bank of England program to inject money into the financial system and proposed insurance to underwrite mortgage- backed debt and toxic assets.
“There’s a distinct souring of investor sentiment toward the U.K. economy,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “Sterling will stay under pressure.”

RBS Stake 

The British government said in a statement yesterday it will increase its stake in Royal Bank of Scotland as it converts the 5 billion pounds ($7.2 billion) of preferred shares it bought last year to ordinary stock.
The new U.K. measures would add at least 100 billion pounds to the 250 billion pounds committed by Prime Minister Gordon Brown in October to underwrite a financial system choked with bad debt and reeling under the first recession in two decades. They increase the government’s grip on consumer and corporate banking and expose taxpayers to hundreds of billions in losses.

The euro fell for a second day against the dollar as the ZEW Center for European Economic Research may say at 11 a.m. in Mannheim that its index of investor and analyst expectations was at minus 43.1 in January, from minus 45.2 the prior month, according to a Bloomberg News survey of economists.

European Recession 

“The survey may add to evidence that the euro zone is in recession,” Tokyo Forex & Ueda Harlow’s Ishikawa said. “The euro may be sold” to $1.30 today, he said.
European Central Bank President Jean-Claude Trichet said yesterday the outlook for the euro-region economy is “substantially” worse than the bank predicted a month ago.

While the ECB is not scheduled to revise its forecasts before March, Trichet said the bank’s 22-member Governing Council took account of the deteriorating outlook in deciding to cut its benchmark interest rate to 2 percent last week. That matched a record low last seen in 2005.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net.
Last Updated: January 19, 2009 19:54 EST