Source: Bloomberg.com
By Bo Nielsen and Ye Xie
The yen fell against all of the most actively traded currencies as carry trade investors resumed borrowing in Japan to buy riskier assets elsewhere.
High-yielding currencies such as the Brazilian real and the New Zealand and Australian dollars were the biggest gainers against the yen as global stocks rallied. The Bank of Japan tomorrow is forecast by economists to keep its benchmark interest rate at 0.5 percent, the lowest among major economies.
``The BOJ not hiking is encouraging the carry traders to try one more time,'' said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million funds under management. ``That's weakening the yen.''
The yen fell 0.38 percent to 114.87 against the dollar and declined 0.71 percent to 155.18 versus the euro at 10:32 a.m. in New York.
Brazil's real advanced 2.3 percent against Japan's currency, while the New Zealand dollar advanced 1 percent and Australia's dollar rose 0.9 percent.
The Swiss franc, another popular source of carry trade funding, fell 0.5 percent against the euro and 0.1 percent versus the dollar.
Japan's benchmark interest rate and Switzerland's 2.5 percent key rate compare with 11.5 percent in Brazil, 8.25 percent in New Zealand, 6.5 percent in Australia and 5.25 percent in the U.S.
The BOJ is forecast by 43 of 46 economists surveyed by Bloomberg News to hold rates steady tomorrow.
The 0.83 percent yield on three-month euro-yen futures for September indicates traders are betting the benchmark interest rate will rise a quarter percentage point to 0.75 percent by the Bank of Japan's meeting that month. The central bank last raised rates in February.
Stocks Rally
The Standard and Poor's 500 Index rose 1 percent, and the Dow Jones Industrial Average increased 0.8 percent. The Dow Jones Stoxx 600 Index of European equities added 1.6 percent to 368.18, while the Morgan Stanley Capital International Asia- Pacific Index gained 0.4 percent.
``Carry trade players are slowly putting their toes in the water now that global markets have calmed down and risk appetite has returned,'' said Boris Schlossberg, senior currency strategist in New York at Forex Capital Markets LLC.
Volatility of the one-month dollar yen option fell to 12.6 percent from 15.75 percent yesterday. That's still above the 7.5 percent average of the past 12 months. Increased volatility discourages carry trades because it makes it harder to predict the profitability of the strategy.
More `Unwinding'
``Even though the interest rate differentials are still favorable, the volatility will keep the carry trades out of the money and set them up for another round of unwinding,'' Dolan said. He forecasts the yen may rise to 110 versus the dollar if high volatility persists.
The U.S. dollar dropped against all of the most actively traded currencies except the yen and the Swiss franc on speculation the Federal Reserve will cut borrowing costs by its September meeting.
``Lower interest rates should weaken the dollar,'' said Michael Metcalfe, head of macro strategy in London at State Street Global Markets. ``That's something we have been factoring into our forecasts for some time.''
The dollar dropped 0.38 percent to $1.3517 against the European currency.
Interest-rate futures show traders see 62 percent odds the Fed will lower its benchmark rate to 4.75 percent from 5.25 percent by next month, compared with a 36 percent chance a week ago. The Fed next meets Sept. 18.
Reduced Fed Fee
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. It said in a statement the move is ``temporary.''
The Fed on Aug. 17 reduced the rate it charges banks for direct loans by 0.5 percentage point to 5.75 percent to ease a shortage of capital in credit markets, while keeping the benchmark rate unchanged. The central bank also dropped language indicating a bias toward fighting inflation and emphasized that economic growth may slow.
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.
The pound advanced 0.9 percent against the yen and 0.4 percent versus the dollar as traders added to bets the Bank of England will raise interest rates again as other central banks stay on hold or cut.
Investors expect the BOE to raise its benchmark rate a quarter percentage point to 6 percent by year-end, futures trading shows. The implied yield on the December interest-rate futures contract increased 11 basis points to 6.14 percent.
To contact the reporters on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net ; Ye Xie in New York at yxie6@bloomberg.net
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