Yen Gains as Global Stock Slump Saps Demand for High Yields

By Stanley White and Ron Harui

Nov. 11 (Bloomberg) -- The yen rose against the euro on speculation a slump in global stocks prompted investors to sell higher-yielding assets and pay back loans in Japan.

Japan's currency gained more than 5 percent versus the Australian and New Zealand dollars in Asia as traders pared so- called carry trades. The euro fell against the dollar before a report that economists say will show investor confidence in Germany, Europe's largest economy, was near a record low this month and traders increased bets for interest-rate cuts in the 15 nations that share the currency.

``Sentiment is in favor of further yen gains,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan's largest currency broker. ``A weak stock market causes a reversal in risk trades, which is supportive of the yen. The euro is vulnerable because the economic outlook points to lower interest rates in the future.''

The yen rose to 124.00 per euro at 11:06 a.m. in Tokyo from 124.95 late yesterday in New York. The yen gained to 97.72 against the dollar from 98.00. The euro bought $1.2689 from $1.2748. The pound was quoted at $1.5581 from $1.5604. The yen may rise to 97.30 per dollar today, Ishikawa said.

Trading may be less than normal as U.S. financial markets are closed today for a public holiday, he said.

Against the Australian dollar, the yen gained to 65.19 from 68.96 late yesterday in Asia and climbed to 56.81 versus the New Zealand dollar from 59.83. It rose to 9.6667 per South African rand from 9.7807.

Investors have been reducing carry trades, where they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.3 percent target lending rate is the lowest among major economies.

Asian Currencies

The South Korean won fell 1.3 percent to 1,343.75 per dollar and the Malaysian ringgit dropped 0.7 percent to 3.5720 on speculation a global slowdown will crimp demand for Asian exports, reducing purchases of emerging-market assets.

Japan's Nikkei 225 Stock Average dropped 3.1 percent as Citizen Holdings Co., the world's biggest maker of mechanical watches, cut its annual earnings target by a third. More than half of the 922 Japanese companies that had reported first-half earnings through Nov. 10 reduced full-year profit targets, according to a report by Shinko Research Institute Co.

Japan's economy will contract 0.2 percent next year, the U.S. by 0.7 percent and the euro area 0.5 percent, the International Monetary Fund said last week.

ZEW Index

Confidence in Prime Minister Taro Aso's leadership is declining, according to an Asahi newspaper poll, with sixty-three percent of respondents saying they didn't support the government's plan to give households cash payments to stimulate the economy.

The leaders of the Group of 20 industrial and emerging nations, due to gather Nov. 14 and Nov. 15 in Washington, will consider steps ranging from raising bank-capital standards to regulating hedge funds in response to the global crisis. Finance ministers from the group called on countries to cut interest rates and raise spending after a meeting Nov. 9 in Sao Paulo.

Against the pound, the euro declined from a record high of 82.09 pence reached yesterday to 81.48 pence.

The ZEW Center for European Economic Research will release its German investor confidence index at 11 a.m. today in Mannheim. The index of investor and analyst expectations was minus 63 in November, the same as last month, according to a Bloomberg News survey. The gauge reached an all-time low of minus 63.9 in July.

ECB Rates

European Central Bank President Jean-Claude Trichet said yesterday in Sao Paulo that receding inflation may allow central banks to further reduce interest rates.

``The euro area's economy isn't doing well and rate cuts are likely to continue,'' said Yuji Saito, head of the foreign- exchange group in Tokyo at Societe Generale SA, France's second- largest bank by market value. ``The euro may be sold.''

The euro may decline to $1.2600 and 123.50 yen today, he said.

Traders increased bets the ECB will reduce its 3.25 percent rate in the first quarter of next year. The implied yield on Euribor interest-rate futures contracts expiring in March fell to 2.86 percent yesterday from 3.005 percent on Nov. 7. The ECB benchmark is 0.39 percentage point higher than the Euribor contract yield, compared with a 12-month average of 19 basis points below the futures rate.

The pound traded near a one-week low against the dollar after the Royal Institution of Chartered Surveyors said U.K. home sales declined to the lowest level in at least three decades.

BOE Odds

The currency declined for a second day on speculation the Bank of England will cut its 3 percent benchmark interest rate further, to help support the economy. The IMF report showed gross domestic product in the U.K. next year will shrink 1.3 percent, a steeper decline than the 0.1 percent contraction forecast in October.

``The euro and sterling are likely to remain weak against the dollar in coming months due to the weaker European growth outlook and with the ECB and BOE expected to cut rates sharply lower with GDP plunging,'' wrote John Praveen, Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which manages $602 billion, in a monthly research report sent to Bloomberg News yesterday.

The implied yield on the December short-sterling futures contract fell to 3.525 percent yesterday, from 3.56 percent on Nov. 7, indicating traders raised bets for more rate reductions.

To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net

Last Updated: November 10, 2008 21:13 EST