Yen Strengthens Against Euro, Dollar on Hedge Fund Bankruptcy

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.

Currency Volatility Declines as Subprime Worry Wanes (Update1)

Volatility on currency options fell further from an eight-year high touched this month as concern eases that a U.S. housing slump is spreading.
JPMorgan Chase & Co.'s index of implied volatility on options for the most-traded currencies fell to 8.19 percent yesterday, down from 8.32 percent at the close of last week, and down 5.21 percentage points from 13.4 percent on Aug. 17, the highest since 1999. Implied volatility, a gauge of traders' expectations for future price swings on currencies, is a component of option prices.
The Federal Reserve cut by a half a percentage point on Aug. 17 the rate it charges banks to borrow, to 5.75 percent, in an attempt to avert a credit crunch and restore investor confidence. Rising delinquencies on subprime mortgages forced two hedge funds managed by New York-based Bear Stearns Cos. to file for bankruptcy in July and other funds, including BNP Paribas SA in France, to halt withdrawals.
``The central banks told the markets that they were going to be involved and that things were going to be ok,'' said Evan Steed, head of currency options at TD Securities Inc. in Toronto. ``The huge panic that we had seen seems to be alleviated.''
Implied volatility on one-month dollar-yen options was at 12.88 percent today at 2 p.m. in Tokyo, down from 23.5 percent on Aug. 17, the highest since January 1999. Swings in the exchange rate increased as the yen rallied after investors, exiting prior bets the yen would fall, drove the currency to a 14-month high of 111.61 per U.S. dollar on Aug. 17. It traded at 115.41 per U.S. dollar today from 115.86 late yesterday.
U.S. Treasury three-month bills yields rose 25 basis points, or 0.25 percentage point, yesterday to 4.47 percent. On Aug. 20 they touched 2.505 percent, the lowest since February 2005 as investors sought the safety of government debt.
Volatility Decline Temporary
Sales of previously owned homes in the U.S. in July declined 0.2 percent, less than forecast, to an annual rate of 5.75 million, from 5.76 million in June, the National Association of Realtors said yesterday. New home sales unexpectedly rose in July for the second time this year, to an annual pace of 870,000, the Commerce Department said Aug. 24.
The decline in currency volatility may be temporary, until after the Sept. 1 Labor Day holiday, according to Tim Graf, derivatives strategist at Credit Suisse Holdings in New York.
``The subprime related credit issues are far from over,'' said Graf. ``For the next year or two, volatility should stay fairly elevated as people won't take risk for granted anymore. Actual volatility in the underlying currencies will stay high.''
A reduced certainty on the direction of interest rate changes by major central banks may increase swings in currencies.
ECB President Steps Back
European Central Bank President Jean-Claude Trichet stepped back yesterday from his earlier signal that interest rates will be increased next week, saying policy makers plan to wait before deciding whether financial market turbulence is hurting economic growth.
In his first public appearance since the market rout began, Trichet said in Budapest the bank was not ``pre-committed'' to raising borrowing costs on Sept. 6. He avoided repeating his Aug. 2 statement that the ECB was monitoring inflation with ``strong vigilance,'' a phrase used to foreshadow previous rate increases.
``No-one can say with any certainty what any of these central banks will do,'' said Graf. ``This will provide volatility to the currency markets in the months ahead.''
Fed funds futures contracts yesterday showed traders see a 28 percent chance the Fed will lower its target for overnight bank lending to 4.75 percent from 5.25 percent at its next meeting on Sept. 18, down from 42 percent odds on Aug. 24.

Yen Gains Against Dollar, Euro as Investors Unwind Carry Trades

The yen snapped a three-day decline against the dollar and euro as traders pared riskier investments funded by loans in Japan.

Japan's yen gained versus the 16 most-active currencies as the so-called carry trades unwound. U.S. stocks declined and a report showed the nation's sales of previously owned homes fell in July for a fifth consecutive month. The yen also benefited from speculation Japan's new Chief Cabinet Secretary Kaoru Yosano will favor an interest-rate increase.

``Risk aversion remains high and people are buying yen again,'' said Robert Fullem, manager of corporate foreign exchange sales with the Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``The environment is not really conducive for putting on carry-trade positions.''

The yen rose 0.5 percent to 158.48 per euro at 2:13 p.m. in New York from 159.26 on Aug. 24. Japan's currency gained 0.3 percent to 116.14 per dollar from 116.44. Moves were exaggerated as some speculators avoided taking positions because of a public holiday in the U.K. The dollar increased 0.2 percent to $1.3649 per euro from $1.3675.

The Japanese yen advanced to as high as 149.27 per euro and 111.61 per dollar on Aug. 17 as losses from investments backed by U.S. subprime mortgages led to a global credit crunch. The credit market since then has stabilized, which helped push down the yen 1.8 percent against the dollar and 3.4 percent versus the euro last week.

The euro fell against the dollar after European Central Bank President Jean-Claude Trichet said he was never ``pre-committed'' to interest-rate increases.

Trichet on Rates

In his first public comments since the market rout began, Trichet said the bank's governing council will wait until it meets Sept. 6 before deciding whether to carry out its plan to raise borrowing costs from 4 percent. The Federal Reserve's interest rate is 5.25 percent.

``He wasn't pre-committed to a rate hike, which disappointed some investors,'' said Samarjit Shankar, director of global strategy for the Global Markets group in Boston at Bank of New York Mellon, the world's largest custodian bank with over $20 trillion in assets under administration. ``The ambivalent tone hurt the euro. The dollar remains well supported by risk aversion.''

Stocks Decline

U.S. stocks declined as the Standard & Poor's 500 Index fell 0.6 percent to 1,470.14 after Lehman Brothers Holdings Inc. analysts reduced their earnings estimates for Countrywide Financial Corp., the biggest U.S. mortgage lender. U.S. Treasuries erased their early declines.

Home Depot Inc., the world's biggest home-improvement retailer, agreed to sell its construction-supply unit for $8.5 billion, cutting the price by 18 percent after the U.S. credit squeeze curbed demand for leveraged-buyout debt, three people familiar with the agreement said. An announcement may come today, the people said.

Existing home sales declined 0.2 percent, less than forecast, to an annual rate of 5.75 million, from a revised 5.76 million in June, the National Association of Realtors said in Washington. That was the slowest pace since November 2002. Sales fell 9 percent compared with a year earlier.

`Credit Crisis'

``The credit crisis isn't yet over,'' said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. ``It will carry into yen crosses, and we'll still see spells of risk aversion.''

Japanese Prime Minister Shinzo Abe shuffled his cabinet today, after his ruling Liberal Democratic Party was routed in elections last month.

Yosano, a former economy and banking minister, said keeping rates near zero is ``abnormal'' before the Bank of Japan raised borrowing costs for the first time in almost six years on July 14, 2006. The central bank next meets on Sept. 18-19.

Japan's benchmark interest rate is 0.5 percent, the lowest among industrialized nations. It compares with 5.75 percent in the U.K., 6.5 percent in Australia and 8.25 percent in New Zealand.

``Monetary policy will be more important for the yen,'' said Kengo Suzuki, currency strategist at Shinko Securities Co. in Tokyo. ``Yosano is BOJ-friendly and that helps. The BOJ may raise interest rates next month.''

Japan's currency may rise to 115 against the dollar by the end of September, he said.

The yen also rose on speculation Japanese exporters bought the currency to settle month-end accounts.

`Buying the Yen'

``Japanese exporters are buying the yen,'' said Nobuaki Tani, a client manager of the Market Trading Office at Resona Bank Ltd. in Tokyo. ``Some of them are still lagging behind in their yen purchases and the currency dropped to cheap levels.''

Futures traders have reversed bets the yen will decline against the dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a fall -- so-called net longs -- was 1,516 on Aug. 21, compared with net shorts of 21,889 a week earlier.

Hedge funds swung to net long positions as they unwound investments in the higher-yielding dollar funded with borrowed yen, a practice known as the carry trade.

``The yen carry trade isn't the one-way bet that it used to be,'' said Tokichi Ito, deputy general manager of foreign exchange at Trust & Custody Services Bank Ltd. in Tokyo. ``Some speculators may look for the yen to gain against the dollar. You can't expect everyone who's been burned during the yen's appreciation to immediately rush back to yen selling.''

Yen Snaps Three-day Slide; Japanese Exporters Buy the Currency

The yen rose, snapping a three-day slide against the dollar and the euro, on speculation Japanese exporters bought the currency to settle month-end accounts.

The yen gained against 13 of the 16 most-active currencies as Japanese companies judged a decline to a two-week low provided an attractive level to buy. The currency also benefited as a report on Aug. 24 showed more bets on a yen advance than a loss in the futures market for the first time since June 2006.

``Japanese exporters are buying the yen,'' said Nobuaki Tani, a client manager of the Market Trading Office at Resona Bank Ltd. in Tokyo. ``Some of them are still lagging behind in their yen purchases and the currency dropped to cheap levels.''

The yen traded at 158.93 per euro at 12:16 p.m. in Tokyo from as low as 159.68 in early trading and 159.26 in New York on Aug. 24. It also was at 116.26 yen from 116.44. The yen may advance to 158.00 per euro and 115.80 versus the dollar today, Tani said. Moves were exaggerated as some speculators avoided taking positions because of a public holiday in the U.K. today.

The yen got an added boost as futures traders reversed bets it will drop against the dollar, figures from the Washington- based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 1,516 on Aug. 21, compared with net shorts of 21,889 a week earlier. Hedge funds swung to net long positions as they unwound investments in the higher-yielding dollar funded with borrowed yen, known as the carry trade.

Net Longs

``The yen carry trade isn't the one-way bet that it used to be,'' said Tokichi Ito, deputy general manager of foreign exchange at Trust & Custody Services Bank Ltd. in Tokyo. ``Some speculators may look for the yen to gain against the dollar. You can't expect everyone who's been burned during the yen's appreciation to immediately rush back to yen selling.''

The yen may move between 116.30 and 117.20 against the dollar today, he said.

The Australian dollar gained to 96.52 yen from 96.33, the New Zealand dollar advanced to 84.27 yen from 84.01 as rising stocks lured investors back to carry trades.

``The yen will head south,'' said Saburo Matsumoto, senior manager of foreign exchange sales at Sumitomo Trust & Banking Co. in Tokyo. ``Rising share prices are likely to give further momentum to the yen carry trade.''

The yen may weaken to 117 per dollar and 160 per euro today, Matsumoto said.

Japan's Cabinet

Japan's 0.5 percent interest rate has given investors the opportunity to borrow yen and buy higher-yielding currencies overseas. Australia's benchmark is 6.5 percent and New Zealand's is 8.25 percent.

Sumitomo Trust's Matsumoto said there will also be pressure for the yen to weaken as Prime Minister Shinzo Abe will focus on winning political support when he reshuffles his Cabinet today.

``This will reduce expectations of Japan's financial and structural reforms, especially among overseas investors, leading to yen-selling,'' Matsumoto said.

Abe tapped his foreign minister and a former land minister to lead his Liberal Democratic Party and will name a new Cabinet today, after the LDP was routed in elections last month.

Abe named Taro Aso, 66, as the party's secretary general and Nobuteru Ishihara, 50, a former land minister, as policy council chairman. Toshihiro Nikai, 68, a former trade minister, was named chairman of the general council.

European Rates

The euro may advance against the dollar on speculation European Central Bank President Jean-Claude Trichet will signal the region's economy is strong enough to withstand an interest- rate increase to contain inflation. Trichet speaks at 3 p.m. in Budapest.

The currency may gain for a fourth day against the dollar as investors raised bets the ECB will increase the benchmark rate from 4 percent when it meets on Sept. 6. The ECB on Aug. 22 said it was sticking to a policy stance expressed by Trichet on Aug. 2, when he pledged ``strong vigilance'' on inflation, a phrase that has signaled each of the eight rate increases since late 2005.

``The ECB has a history of signaling rate increases to the market and they will follow through,'' said Matthew Jones, a currency strategist at Travelex Australasia Group in Sydney. ``Inflation is still a concern. The euro will push up to the $1.37 level.''

Goldman Sachs Group Inc. and Merrill Lynch & Co. increased their year-end forecasts for the euro as much as 6 percent last week as concern the rout in subprime mortgages will erode European bank earnings abated.

Citigroup Inc. says the euro may rise to $1.42 by the end of the year from $1.3675 on Aug. 24. It was last quoted at $1.3669 from $1.3675.