Source: Bloomberg.com
By Aaron Pan and Kosuke Goto
The yen fell the most in three years against the euro as stocks rallied, reviving confidence in trades that depend on borrowing in the Japanese currency to buy riskier assets.
Investors sold yen and bought the higher-yielding Australian and New Zealand dollars, which rose around 3 percent versus Japan's currency. Stocks in Europe and Asia advanced, while U.S. index futures climbed, encouraging the carry trades. The Bank of Japan kept its benchmark rate at 0.5 percent, the lowest among major economies.
``Equity markets have stabilized and riskier assets are gaining renewed support,'' said Ian Stannard, a currency strategist at BNP Paribas SA in London. ``The yen is back under pressure.''
The Japanese currency weakened as much as 1.8 percent against the euro, the biggest drop since June 2004, before trading at 158.66 as of 7:24 a.m. in New York, from 156.20 late yesterday. The yen also fell as much as 1.6 percent against the dollar, the most since January 2005, before trading at 116.78, from 115.34.
Japan's currency briefly pared losses after one of nine members of the central bank's board, Atsushi Mizuno, voted to raise the overnight lending rate.
The central bank's governor, Toshihiko Fukui, said later in Tokyo there's a risk that keeping interest rates too low will spur risky investment. He also said the bank was watching how credit-market turmoil would affect confidence.
``One dissenting vote implies there will be a move next month,'' said Tokichi Ito, deputy general manager of foreign exchange at Trust & Custody Services Bank Ltd. in Tokyo.
Australia, New Zealand
Losses in the yen may swell should it break through 116.50 per dollar, where traders have orders to sell, said Keiichi Iguchi, a dealer in Tokyo at Resona Bank Ltd. Traders sometimes place instructions to limit losses in case bets go the wrong way.
The Japanese currency dropped 3.6 percent to 83.74 yen per New Zealand dollar and 2.9 percent to 95.74 yen from 93.03 against Australia's dollar. Investors are returning to carry trades that capture the difference in interest rates between the countries.
The yen last week posted the biggest increase against the euro since March 2000 as the subprime mortgage crisis spread through global credit markets.
Countrywide Financial Corp., the biggest U.S. mortgage lender, said it received a $2 billion capital injection from Bank of America Corp., reassuring investors the global credit rout is being contained. The shares climbed 20 percent in extended trading yesterday.
Stock Markets
The U.S. Standard & Poor's 500 Index has gained 4.1 percent in the past five days after losing 6 percent the previous five, signaling investors are regaining their appetite for risk.
Japan's benchmark rate compares with 8.25 percent in New Zealand, 6.5 percent in Australia and 5.25 percent in the U.S. The yield on the three-month euro-yen future for September rose 2 basis points to 0.85 percent today, indicating traders are betting the BOJ will increase rates at the next meeting on Sept. 18-19.
Investors saw a 39 percent chance of a rate increase next month, according to Credit Suisse Group calculations based on interest payments.
``The Bank of Japan did the right thing today,'' said Callum Henderson, head of foreign-exchange strategy at Standard Chartered Bank in Singapore. ``They'll probably wait a couple of months until there are further signs the Japanese economy is recovering. It's good news for carry trades, good news for risk.''
Volatility Eases
Volatility on one-month dollar-yen options fell to 11.40 percent from 12.35 percent yesterday. Lower volatility may encourage carry trades as it implies less risk of losing money on exchange-rate swings.
The euro traded at $1.3586 per dollar, the highest in a week, on speculation the global credit-market crisis won't hurt economic growth enough for the European Central Bank to delay raising interest rates as soon as September.
Europe's single currency headed for a two-day rally after the ECB indicated yesterday it was sticking to the policy expressed by President Jean-Claude Trichet on Aug. 2, when he pledged ``strong vigilance'' on inflation, a phrase that has signaled each of the eight rate increases since late 2005.
ECB Outlook
``The ECB's stance suggests it will probably hike rates next month,'' said Masashi Kurabe, currency manager at Bank of Tokyo- Mitsubishi UFJ Ltd. in Tokyo. ``The trend for the euro is up.''
Investors increased bets the ECB will raise rates from 4 percent next months after the Federal Statistics office in Weisbaden said Germany's economy grew 0.3 percent in the second quarter from the prior three months, unchanged from the preliminary figure.
The implied yield on the September Euribor interest-rate contract rose 9 basis points to 4.58 percent. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB key rate since 1999.
To contact the reporter on this story: Aaron Pan in London at apan8@bloomberg.net ; Kosuke Goto in Tokyo at kgoto2@bloomberg.net
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