The yen rose against the 16 most- active currencies after an Australian hedge fund filed for bankruptcy protection, prompting investors to sell riskier assets purchased with loans from Japan.
The currency recovered from its biggest loss in almost three years against the dollar as Sydney-based Basis Yield Alpha Fund said in the Aug. 28 petition that U.S. home loan defaults had wrecked the value of its debt holdings. The yen also rebounded from a 2.2 percent decline against the euro yesterday, when rallying U.S. stocks prompted investors to resume so-called carry trades.
``This revives concerns over how much deeper subprime mortgage losses will be,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. ``It's natural for carry trades to be unwound and the yen to be bought.''
Japan's currency rose to 115.97 per dollar at 11:26 a.m. in Tokyo from 116.17 late in New York yesterday, when it had the biggest loss since Jan. 2005. The yen advanced to 158.39 per euro from 158.89 yesterday, when it fell the most in more than three years. It may rise to 115.50 per dollar today, Ishikawa said.
The yen rose 0.7 percent against the New Zealand dollar to 81.71, paring yesterday's 3.3 percent surge. It gained 0.5 percent to 95.05 versus Australia's dollar. The currencies had been carry-trade favorites, with interest rates as much as 7.75 percentage points higher than in Japan.
The yen has gained 7.1 percent against the dollar since Bear Stearns Cos. said on June 22 it would bail out a hedge fund that lost money on securities related to loans to home owners with a poor credit history. Bear Stearns's rating was cut at CIBC World Markets yesterday because the fifth-biggest U.S. securities firm's profit outlook is ``ominous.'' The Basis Yield fund is run by Basis Capital Fund Management Ltd.
Carry Trades
Volatility on one-month dollar-yen options rose to 15 percent yesterday from 13.2 percent a day earlier and to 15.5 percent from 14 percent on euro-yen options. Higher volatility may discourage carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.
Gains in the yen may be limited by speculation Japanese investors will sell the currency to purchase overseas assets.
Securities firms, asset management companies and banks in Japan will market 1.6 trillion yen ($14 billion) of investment trusts focused on offshore securities this week, according to data compiled by Bloomberg.
Japan's benchmark interest rate is the lowest in the industrial world at 0.5 percent, helping push down the yen against 12 of the 16 most-active currencies in the past year.
``I expect the yen to have a soft bias,'' said Hiroshi Yoshida, foreign exchange trader at Shinkin Central Bank in Tokyo. ``There's significant portfolio flows out of Japan today and tomorrow that should weaken the yen'' to 116.50 per dollar.
BOJ Hawk
Bank of Japan policy board member Atsushi Mizuno said the U.S. subprime crisis shows the need for higher interest rates in a speech to business executives in Kofu, central Japan. Mizuno also said Japan's consumer price index may have bottomed out in March and the pace of future price gains is likely to be gradual.
Mizuno was the sole dissenter when the BOJ kept rates on hold in July and August, proposing a rate increase at both meetings. He will hold a press conference at 1:30 p.m.
``Mizuno's comments are hardly representative of what other policy members are thinking,'' said Akio Shimizu, chief manager of foreign exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The trend for Japanese prices suggests interest rates won't rise quickly enough to boost the yen.''
Japan's currency may trade between 115.30 and 116.20 against the dollar today, he said.
Inflation Report
The core consumer price index, due tomorrow at 8:30 a.m. in Tokyo, fell 0.1 percent on year in July, matching its decline in the previous month, according to a Bloomberg survey of economists.
The odds the bank will lift rates fell to 22 percent from 39 percent a week ago, based on calculations by Credit Suisse Group using overnight interest-rate swaps. Japan's retail sales fell 2.2 percent on year in July, worse than economists' forecast for a 0.8 percent decline, government data showed today.
Subprime Woes
The dollar may decline against the euro on speculation the Federal Reserve will lower interest rates next month as the subprime-mortgage turmoil threatens to crimp growth in the U.S. economy.
``Subprime woes are the main issue that may adversely affect the U.S. economy,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``The Fed is likely to cut rates next month.''
The dollar traded at $1.3652 per euro from $1.3677. It may decline to $1.3680 per euro and 115.40 yen today, Muramatsu said.
Interest-rate futures show traders see a 56 percent chance the Fed will cut its benchmark rate to 5 percent at its Sept. 18 meeting, up from 34 percent a month earlier. The chance of a cut to 4.75 percent is 44 percent.