(Source: Bloomberg.com)
By Stanley White and Ron Harui
The yen strengthened for a second day against the euro as rising volatility related to credit market turmoil increased the risk for investors to hold global securities financed by borrowing in Japan.
Japan's currency also gained versus the dollar as traders stepped up bets the Federal Reserve will cut interest rates by September while the Bank of Japan is likely to keep its benchmark rate at 0.5 percent at a two-day meeting starting today. A smaller rate differential diminishes the appeal of buying a higher-yielding asset with yen, known as a carry trade.
``Volatility makes yen carry trades an impractical strategy, so people will push it higher against the euro,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The BOJ won't raise rates while there's instability in global markets and the Fed is likely to lower rates soon. The initial reaction would be to sell the dollar.''
The yen rose to 153.93 per euro at 10:51 a.m. in Tokyo from 154.08 late in New York yesterday. It was at 114.40 against the dollar from 114.43. Japan's currency may rise to 153 against the euro and 114.05 per dollar today, Soma said.
Volatility on one-month dollar-yen options rose as high as 16.2 percent, more than twice the 12-month average. Rising volatility discourages carry trades because it implies the bets will be exposed to greater exchange-rate fluctuations.
U.S. Treasury Secretary Henry Paulson said yesterday in an interview with CNBC that volatility in credit markets related to subprime mortgage losses will ``take time'' to subside.
'All of the Tools'
The yen climbed today against the 16 most-active currencies, including the Australian and New Zealand dollars, favorites of the carry trade. Australia's dollar fell 0.4 percent to 91.34 from 91.73 in New York yesterday and New Zealand's declined 0.7 percent to 79.17 from 79.71.
Japan's benchmark rate compares with 8.25 percent in New Zealand and 6.5 percent in Australia.
The benchmark Nikkei 225 Stock Average fell 0.3 percent. It has lost 12 percent in the past month as investors sold riskier assets such as stocks.
Senate Banking Committee Chairman Christopher Dodd said yesterday Fed Chairman Ben S. Bernanke agreed to use ``all of the tools at his disposal'' to restore stability in financial markets roiled by the subprime mortgage crisis. Dodd made the comments after a meeting with Bernanke and Paulson in Washington.
``A cut in the Fed funds rate may be what needs to be done,'' said Richard Grace, senior currency strategist at Commonwealth Bank of Australia in Sydney. ``We could see the dollar come under some downward pressure.''
Fed Action
U.S. interest-rate futures show traders yesterday saw a 90 percent chance the Fed will lower its target rate to 4.75 percent from 5.25 percent by its September meeting, up from 70 percent odds on Aug. 20.
The Fed on Aug. 17 reduced the rate it charges banks for direct loans by 0.5 percentage point to 5.75 percent and dropped language indicating a bias toward fighting inflation and highlighted a rising threat to economic growth.
The New York Fed yesterday lowered the fee that bond dealers pay to borrow its Treasuries to a record low in a bid to ease a shortage in the market for loans backed by the securities. The Fed said in a statement the move is ``temporary.''
Unlikely to Recover
The BOJ will hold rates at the lowest among major economies, according to 43 of 46 economists surveyed by Bloomberg News.
The yield on three-month euroyen futures for September, at 0.82 percent, indicates traders are betting the BOJ will raise rates a quarter-percentage point to 0.75 percent at its September meeting. The central bank last raised rates in February.
``Risks to our forecast of another BOJ rate hike on Sept. 19 appear to be growing significantly,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America N.A. in Tokyo. ``Even though the panic may have passed, risk appetite by Japanese investors is not likely to recover to the extreme levels before the recent unwinding of the carry trade.''
Governor Toshihiko Fukui, whose five-year term ends in March, has said before that leaving borrowing costs abnormally low will fuel risky investments. Atsushi Mizuno was the only policy board member to oppose the bank's decision last month to keep rates on hold.
``If one or two members vote against the BOJ skipping a rate hike at the meeting starting today, that would indicate a September rate hike,'' said Tetsuhisa Hayashi, chief currency trader in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest lender by assets. ``It would raise concern over stock prices, leading to yen-buying.''
Japan's currency may move between 112 and 115 per dollar this week, he said.
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net
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