By Stanley White and Ron Harui
(Bloomberg) -- The yen dropped against 15 of the 16 most-active currencies after the Bank of Japan kept its interest rate at 0.5 percent, the lowest in the industrialized world.
The currency declined the most versus South Korea's won and Norway's krone as the decision boosted appetite for higher- yielding assets bought with borrowed yen, or carry trades. A government report showed Japan's machinery orders fell more than expected in August, weakening the central bank's case for a rate increase this year.
``The BOJ won't be able to raise rates until December at the earliest,'' said Akira Kato, senior manager of the foreign- exchange trading department at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. ``The yen carry trade will prevail as long as rates stay low.''
The yen fell to 166.49 versus the euro, the lowest since July 24, before trading at 166.40 at 7:50 a.m. in London, from 165.84 late in New York. Japan's currency was little changed at 117.27 per dollar. It may fall to 118 a dollar and 170 a euro by year-end, Kato said.
Machine orders declined a more-than-expected 7.7 percent in August, after gaining 17 percent the month before, the Cabinet Office said today in Tokyo.
The yen dropped 0.2 percent to 7.8158 against the Korea won from 7.8319 yesterday, and declined 0.3 percent to 21.6290 versus the Norwegian krone from 21.5564. Rates are 5 percent in Norway and South Korea, where the Asian nation's central bank kept borrowing costs on hold today.
Funding Currency
The BOJ voted 8-1 to keep rates on hold, with board member Atsushi Mizuno the only dissenter. All 39 economists surveyed by Bloomberg predicted the decision. The central bank also kept its assessment of the economy unchanged in its monthly report. Governor Toshihiko Fukui was due to brief reporters at 3:30 p.m. in Tokyo.
``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.'' It may fall to 170 by year-end, Soma forecast.
Australia's dollar rose to 105.61 yen from 105.29 yen late in New York yesterday. New Zealand's dollar advanced to 89.74 yen from 89.50 yen.
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
European officials this week voiced concern Asian currencies, especially the Chinese yuan and the yen, are too weak, ahead of a Group of Seven nations' meeting on Oct. 19 in Washington.
European Central Bank Executive Board Member Lorenzo Bini Smaghi said aspects of yen trading were ``disturbing,'' the International Herald Tribune reported.
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, President Jean-Claude Trichet and policy makers Jose Manuel Gonzalez-Paramo and John Hurley speak today. Trichet said 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.
Moody's Investors Service raised Japan'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.
Yuan, Yen
``Europe wants a stronger yuan and yen'' to help address trade imbalances, said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. The yen may advance to 164.50 per euro and 116.50 against the dollar today, he said.
The yen fell against all 16 of the 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.
The dollar's losses against the euro may be tempered by speculation Federal Reserve Governor Randall Kroszner will today express confidence U.S. financial markets are improving, reducing the need for the central bank to lower interest rates further to bolster growth.
The U.S. currency fell to $1.4190 versus the euro from $1.4145 yesterday, a third day of declines.
Kroszner, Fed
Traders reduced bets on a Fed rate cut this month after minutes of the Sept. 18 meeting showed 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 at 10:45 a.m. in Durham, North Carolina. Three Fed bank presidents said this week credit market conditions have improved.
Futures contracts on the Chicago Board of Trade indicate a 36 percent chance the Fed 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.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net
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