Yen Rises to 1 1/2-Year High Against Dollar on Risk Reduction

By Stanley White and David McIntyre

Bloomberg

The yen rose to a 1 1/2-year high against the dollar as a slump in Asian stocks prompted investors to cut holdings of higher-yielding assets bought with money borrowed in Japan.

Japan's currency climbed to the highest in almost two months against New Zealand's dollar, a favorite target of the so-called carry trade, on speculation HSBC Holdings Plc will this week announce losses stemming from bad U.S. home loans. The yen gained to a more than two week-high versus the euro as Asian stocks fell for a third day.

``The big beneficiary at the moment is the yen,'' said Sue Trinh, a senior currency strategist in Sydney at RBC Capital Markets, the second-most accurate forecaster of exchange rates in the second quarter in Bloomberg surveys. ``Risk aversion has dominated and we've seen the carry trade unwind on credit-market concerns.''

The yen traded at 110.51 per dollar at 9:55 a.m. in Tokyo and touched 110.22, the highest since May 2006, from 110.69 late in New York Nov. 9. It was at 162.32 per euro from 162.48 late last week. Trading volumes in Asia may be less than normal as today is a public holiday in the U.S.

Japan's currency advanced 0.9 percent to 99.99 per Australian dollar and reached 99.54, the strongest since Oct. 22. Against New Zealand's currency, the yen strengthened 0.7 percent to 83.97 and touched 83.38, the highest since Sept. 18.

Bad Debts

The yen gained against all of the 16 most-actively traded currencies after the Daily Telegraph reported HSBC, Europe's largest bank by market value, is set to announce $1 billion of bad debts stemming from its U.S. mortgage business this week. The U.K. newspaper didn't cite the source of its information in the Nov. 11 report on its Web site. Gareth Hewett, a Hong Kong- based HSBC spokesman, declined to comment.

The yen has risen 7.2 percent against the dollar this year and cut its losses versus the euro to 2.9 percent as concerns the housing slump in the U.S. is deepening prompts investors to repay loans in Japan. The world's biggest banks have written down at least $40 billion as prices of mortgage-related assets plummeted.

Credit-market turmoil prompted the Reserve Bank of Australia to buy the nation's currency in August for the first time since 2001 to help steady foreign exchange markets, the central bank said in its quarterly monetary statement today. The currency has also tended to move in line with equity markets, the Reserve Bank said.

Lower Stocks

The Morgan Stanley Asia-Pacific Index of regional shares fell 2 percent, the third day of losses, suggesting investors' confidence for carry trades may wane.

In carry trades, investors get loans in countries with lower benchmark borrowing costs, such as Japan's 0.5 percent, and buy assets in places with higher interest rates. New Zealand's rate is 8.25 percent, Australia's is 6.75 percent, Europe's is 4 percent and the U.S. cost of borrowing is 4.5 percent. The strategy is considered risky because currency fluctuations can erase the profit earned on the gap between the borrowing and lending rates.

Gains in the yen may be limited by speculation Japanese importers will take advantage of its gains by selling it for other currencies to settle their accounts.

``We haven't seen the yen this strong in a while, so Japanese importers may want to sell into this rally,'' said Masahiro Sato, joint general manager of the treasury division at Mizuho Trust & Banking Co. in Tokyo, a unit of Japan's second- largest publicly traded lender. ``There seems to be lots of buy orders for euro and other yen crosses.''

The yen may fall to 111 against the dollar and 162.50 per euro today, he said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net ; David McIntyre in Sydney at dmcintyre2@bloomberg.net