By Stanley White and Ron Harui
Oct. 11 (Bloomberg) -- The yen was little changed before the conclusion of a two-day Bank of Japan interest-rate meeting at which economists expect policy makers to keep borrowing costs at the lowest of any major economy.
The currency traded near the weakest in more than two months versus the Australian and New Zealand dollars as the outlook for Japan's rates to remain low boosted appetite for higher-yielding assets bought with borrowed yen, or carry trades. A government report showed machinery orders fell more than expected in August.
``There's no reason for the yen to stop weakening,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``Arguments for higher interest rates in Japan aren't convincing because economic data don't support a hike. The yen will remain an attractive funding currency for its low rates.''
The yen traded at 165.90 versus the euro at 12:30 p.m. in Tokyo from 165.84 late in New York, when it touched 166.25, the weakest since July 25. It may fall to 170 by year-end, Soma forecast. Japan's currency was at 117.21 per dollar from 117.24 yesterday. The euro traded at $1.4155 from $1.4145.
Japan's currency showed little reaction to a decision by Moody's Investors Service to raise the nation's debt rating by one level to A1, the fifth-highest investment grade. It's the first time the U.S. ratings company increased the long-term local currency rating, and follows four downgrades since 1998.
Machine orders declined a seasonally adjusted 7.7 percent in August, after gaining 17 percent the month before, the Cabinet Office said today in Tokyo. The median estimate of 42 economists surveyed by Bloomberg News was for a 5.6 percent drop.
Machine Orders
``Machinery orders data may eventually prove to be a yen- selling factor,'' said Takuma Kurosawa, global markets treasurer at HSBC Bank in Tokyo. ``It suggests the BOJ will have difficulty raising rates and calls into doubt how much capital expenditure will support economic growth.''
The yen may move between 116.90 and 117.50 against the dollar today, Kurosawa said.
The BOJ has kept borrowing costs at 0.5 percent since February, when policy makers raised rates a quarter-percentage point, and will leave them unchanged today, all 39 economists surveyed by Bloomberg predicted.
In carry trades, investors borrow in low interest-rate countries, such as Japan, to buy assets in nations such as New Zealand, where borrowing costs are 8.25 percent, or Australia, where rates are 6.5 percent. The risk is that currency fluctuations will erase any profit from the difference in rates.
European Officials
Japan's currency snapped two days of declines versus the euro on speculation European officials will today voice concern that Asian currencies, especially the Chinese yuan and the Japanese yen, are too weak, ahead of a Group of Seven nations' meeting on Oct. 19 in Washington.
European Union Monetary Affairs Commissioner Joaquin Almunia this week urged China and other emerging nations with large trade surpluses to allow their currencies to appreciate.
Almunia, European Central Bank President Jean-Claude Trichet and policy makers Jose Manuel Gonzalez-Paramo and John Hurley speak today. Trichet said this week investors in the yen should take account of the Japanese economy's ``sustainable recovery path'' and that exchange rates ``should reflect economic fundamentals,'' suggesting the yen needs to strengthen.
``Europe wants a stronger yuan and yen'' to help address so- called global imbalances, said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. ``It's a plus for the yen,'' which may advance to 164.50 per euro and 116.50 against the dollar today, he said.
The yen fell against all 16 most-active currencies in the past month, increasing the competitiveness of Japan's exports. A Japanese report today showed the current-account surplus rose in August as companies and individuals earned more from overseas investment and export growth accelerated.
Fed Officials
The dollar may be bolstered by speculation Federal Reserve Governor Randall Kroszner will today express confidence U.S. financial markets are improving.
The U.S. currency may end a two-day losing streak against the euro on prospects the Fed won't have to hurry to lower interest rates further to bolster growth. Traders reduced bets on a Fed rate cut this month after minutes of the Fed's Sept. 18 meeting showed this week that policy makers aren't convinced the economic expansion is coming to an end.
``Kroszner may signal the worst is over,'' said Lee Wai Tuck, currency strategist at Forecast Singapore Ltd. ``It would be supportive of the dollar,'' which may rise to $1.4080 per euro and 117.50 yen today, he said.
Kroszner speaks to the National Bankers Association National Convention at 10:45 a.m. in Durham, North Carolina. Three Fed bank presidents including San Francisco Fed's Janet Yellen said this week credit market conditions have improved.
Futures contracts on the Chicago Board of Trade indicate a 36 percent chance the central bank will cut its benchmark rate a quarter-percentage point to 4.5 percent at its meeting Oct. 31, compared with 72 percent odds a week ago.
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