(Bloomberg) -- The yen fell against the dollar and touched a six-week
low versus the euro after stocks and bonds in the U.S. and Europe
rallied.
Japan's yen declined against all 16 major currencies as investors
jumped back into carry-trade bets that involve borrowing funds in
Japan to purchase higher-yielding assets elsewhere. The cost of
overnight loans in dollars decreased a third day, after the Federal
Reserve cut its benchmark interest rate by a half-percentage point to
4.75 percent on Sept. 18.
``Risk aversion is coming down, which gives investors an incentive to
push down the yen,'' said Christian Dupont, a senior currency trader
at Societe Generale SA in Montreal.
The yen fell 0.7 percent to 115.60 per dollar at noon in New York. The
yen declined 0.8 percent to 162.73 per euro, touching the weakest
since Aug. 9. The yen has lost 0.1 percent versus the dollar and 1.6
percent against the euro this week.
The dollar headed for the biggest weekly loss since November 1988
against the Canadian dollar, falling 2.9 percent, and is down a third
straight week versus the euro. The U.S. currency has lost 1.5 percent
this week against the euro. It set a record low today on speculation
the Fed will cut rates further to spur growth, dimming the allure of
U.S. deposits.
The U.S. currency traded at $1.4078 per euro and reached $1.4120, the
weakest since the euro's 1999 debut. It touched $1.0064 per Canadian
dollar today, the weakest since 1976.
Dollar Index Falls
The New York Board of Trade's dollar index comparing the U.S. currency
against six primary peers including the euro and yen, touched 78.398,
the lowest since September 1992. The Fed's major currency
trade-weighted dollar index dropped to 74.78 yesterday, the weakest
since its inception in 1971.
The yen has lost 4.2 percent this week against the New Zealand dollar
and 3 percent versus the Australian dollar, two carry-trade favorites.
Japan's 0.5 percent benchmark borrowing rate, the lowest among
industrialized nations, compares with 4 percent in the euro region,
6.5 percent in Australia and 8.25 percent in New Zealand.
In the carry trade, investors borrow in a country with low interest
rates and invest where rates are higher, earning the difference. The
risk is that currency moves may erase profits.
Volatility on one-month euro-yen options fell to 10.05 percent today,
the lowest on a closing basis since Aug. 8. Volatility, a measure of
expected swings in exchange rates, reached 26 percent on Aug. 17, the
highest since Bloomberg started tracking the data in January 1999.
Lower volatility encourages carry trades as it implies the bets will
be exposed to smaller exchange-rate fluctuations.
Money Market Rates
The London interbank offered rate that banks charge each other for
overnight loans in dollars dropped 4 basis points to 4.90 percent,
according to the British Bankers' Association. A basis point is 0.01
percentage point.
Speculative borrowers sold $1.83 billion of debt this week, the most
since July, according to data compiled by Bloomberg.
The Standard & Poor's 500 Index gained 0.7 percent. The 10- year
Treasury note yield fell 0.05 percentage point to 4.65 percent.
``Cheap money definitely helps out the carry trade,'' said Joseph
Francomano, vice president of foreign exchange at Erste Bank in New
York. ``Nobody is diving in 100 percent but they are definitely
getting their feet wet again. That is weakening the yen.''
Yen Quarterly Rally
The yen rallied to 111.61 per dollar last month, the strongest since
May 2006, as losses from U.S. mortgage securities roiled the global
credit and equity markets, led investors to flee riskier assets. The
yen is still up against all 16 major currencies this quarter.
The U.S. currency has fallen against 15 of the 16 most- active
currencies this week. Fed Chairman Ben S. Bernanke said yesterday
credit market turmoil may make the housing recession more severe.
``The dollar weakness will drag on,'' said Simon Derrick, chief
currency strategist at Bank of New York Mellon Corp. in London. ``The
crisis is not over and the Fed is likely to cut rates further.''
Futures contracts show traders see a 70 percent chance of a
quarter-percentage point cut to 4.5 percent at the Fed's next meeting
on Oct. 31.
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