Yen Trades Near 7-Week High Versus Euro as Asian Stocks Decline

By Ron Harui

Sept. 2 (Bloomberg) -- The yen traded near a seven-week high against the euro on concern U.S. financial institutions will incur more losses and as regional shares fell, renewing demand for the relative safety of Japan’s currency.

The yen was close to its strongest level versus the dollar in more than a month after U.S.-based CIT Group Inc. deferred interest payments on subordinated bonds and as lower profit targets at Japanese companies sent shares lower. The Australian dollar climbed from near a one-week low against the greenback after a report showed economic growth unexpectedly accelerated.

“There are lingering worries about the health of the U.S. banking sector,” said Toshihiko Sakai, head of trading for foreign exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. “The bias is for the yen and the dollar to be bought.”

The yen traded at 131.97 per euro as of 6:35 a.m. in London from 132.19 in New York yesterday, after earlier reaching 131.46, the highest level since July 15. Japan’s currency was at 92.85 per dollar from 92.92.

The euro bought $1.4213 from $1.4224 in New York yesterday, when it touched $1.4178, the weakest level since Aug. 19. The Australian dollar climbed to 83.18 U.S. cents after earlier falling to 82.41 cents, the lowest level since Aug. 27.

Asian Stocks Decline

The MSCI Asia Pacific Index fell 1.6 percent, the most since Aug. 17, after Seven & I Holdings Co., the world’s biggest convenience store operator, and Japanese homebuilder Sekisui House Ltd. cut profit forecasts. The gauge of Asian shares has rallied 59 percent from a more than five-year low on March 9.

“Markets worry that they may have run up too much too fast,” Philip Wee, senior currency economist in Singapore at DBS Group Holdings Ltd., wrote in a research note today. “Risk aversion returned. Expect the dollar to head higher on lower Asian stocks.”

CIT said in a regulatory filing it was forced to delay payments on subordinated bonds due 2067 because efforts to execute a so-called alternative payment mechanism have been unsuccessful. The U.S. lender got $3 billion in financing from creditors in July to avoid collapse.

U.S. banks on the West Coast still face credit deterioration and higher loan losses, said analysts at RBC Capital Markets.

Capital Concerns

“Many of these banks may still not have enough capital and reserves” to cushion against writedowns from the worsening real estate market, analysts Joe Morford and David King wrote in a research report.

The yen tends to gain in times of financial turmoil as Japan’s trade surplus reduces reliance on foreign capital, while the dollar benefits from its status as the world’s main reserve currency. The VIX Index, a measure of stock-market volatility known as Wall Street’s fear gauge, climbed to as high as 29.23 yesterday, the most since July 13, from 26.01 on Aug. 31.

Australia’s dollar rose and the yen pared gains after the Bureau of Statistics said today in Sydney the nation’s gross domestic product expanded 0.6 percent in the second quarter from the previous three months, when it grew 0.4 percent.

The median estimate of 20 economists surveyed by Bloomberg News was for a 0.2 percent expansion.

“The GDP number was a big surprise compared to market forecasts,” said Greg Gibbs, a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. “Markets are rushing to front-load those rate hikes again and consequently the currency has bounced.”

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

RBA Rate Bets

Traders increased bets the Reserve Bank of Australia will lift borrowing costs over the next 12 months. Policy makers will raise the target rate by 1.81 percentage points within a year, according to a Credit Suisse AG index based on swaps trading. The index implied a 1.75 percentage-point increase yesterday.

South Korea’s won fell the most in two weeks after global stocks retreated on concern U.S. banks will report additional losses.

“I’d associate the decline in U.S. equities last night with elevated risk aversion, which we see in the VIX,” said Tim Condon, chief Asia economist in Singapore for ING Groep NV. “That would be correlated with declines in Asian currencies such as the Korean won.”

The won weakened 0.8 percent, the most since Aug. 17, to 1,250.85 versus the dollar, according to data compiled by Bloomberg. The Kospi index declined 0.7 percent,

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net
Last Updated: September 2, 2009 01:57 EDT