Yen Declines Versus Euro on Risk Appetite and Japanese Politics

Sept. 13 (Bloomberg) -- The yen fell the most against the dollar and euro in more than two weeks as investors took advantage of political uncertainty in Japan and increasing risk appetite to buy assets funded by loans in the country.

Japan's yen fell versus all 16 most-active currencies as global stocks gained and the unexpected resignation of Prime Minister Shinzo Abe yesterday raised speculation whether the Bank of Japan will boost interest rates this year. The dollar rose after reaching a record low versus the euro as a technical gauge showed the U.S. currency may be poised to rally.

``Political disorder in Japan is entering the mix and is adding to the pressure on the yen,'' said Greg Salvaggio, vice president of capital markets at currency-trading company Tempus Consulting in Washington. ``The BOJ has proven to be unwilling to move in times of political turmoil and is likely to take a wait- and-see approach following Abe's resignation.''

The yen fell 0.9 percent to 115.27 versus the dollar at 12:56 p.m. in New York. It declined 0.8 percent to 160.18 versus the euro. The dollar rose to $1.3895 per euro, from $1.3904 yesterday, after trading at a record low of $1.3927 earlier.

Investors' appetite for risk rose as the Dow Jones Industrial Average gained 1.1 percent to 13,430.98 while the Standard & Poor's 500 Index increased 0.9 percent to 1,485.19. Stocks in Europe and Asia also strengthened.

The yield on three-month euro-yen December futures has fallen to 0.81 percent from 1.03 percent two months ago as investors pare expectations of rate increases by the BOJ.

`Unlikely to Raise'

``The question is whether the new government will press the BOJ to keep rates on hold to spur growth,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``Unless U.S. growth improves, and the growth picture in Japan improves, which I don't think we will have in the next few months, the BOJ is unlikely to raise rates.''

Japan's economy contracted at a 1.2 percent annual rate in the three months ended June 30, almost twice the pace forecast by analysts, the Cabinet Office said in Tokyo this week. The government initially forecast a 0.5 percent expansion.

The BOJ's key overnight lending rate of 0.5 percent is the lowest among major economies, encouraging investors to put on so- called carry trades in which they borrow in countries with low interest rates, such as Japan, to invest in higher-yielding assets elsewhere. Higher borrowing costs in Japan would decrease the profitability of the trade.

The benchmark rate is 11.25 percent in Brazil and 6.5 percent in Australia. The yen fell 1.8 percent versus the Brazilian real and 0.8 percent against the Australian dollar.

The Japanese currency fell 1.6 percent versus the New Zealand dollar after its central bank left the key interest rate at a record-high 8.25 percent today.

Swiss Franc

The Swiss franc, a popular funding source for the carry trades, fell even after policy makers raised borrowing costs a quarter-percentage point today to 2.75 percent. It declined to 1.6487 versus the euro, from 1.6475 yesterday.

Goldman Sachs Group Inc.'s Global Alpha hedge fund fell 22.5 percent in August. Its biggest losses stemmed from selling the yen and buying Australian dollars. The carry trade unraveled when the Australian dollar fell 6 percent against the yen in August, according to an update sent to investors.

The dollar has lost 3.3 percent versus the euro since Aug. 16, pushing the 14-day relative strength index for the dollar against the euro to 68.93, up from about 32 on Aug. 16. A reading above 70 indicates a reversal may occur.

Decreases in interest rates on interbank loans and commercial paper indicated some resumption in lending after the past month's losses in asset-backed securities.

Three-month Libor, a key indicator of bank willingness to lend, decreased to 5.69 percent, the lowest since Sept. 3, from 5.70 percent, the British Bankers' Association said.

`Dollar Strength'

``You may see some short-term dollar strength against the euro as investors are waiting for what the Fed is going to do next week,'' said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York

Fitzpatrick sees ``heavy'' option barriers between $1.3940 and $1.40 slowing further losses. The options are put in place by traders betting the dollar won't fall past that point, and they will protect these wagers by dollar buying once the currency approaches these levels.

Traders lowered bets the Fed will cut its benchmark interest rate to 4.75 percent from 5.25 percent at its Sept. 18 meeting.

Interest-rate futures show 60 percent odds the Fed will lower borrowing costs by half a percentage point, down from 74 percent yesterday.

Pound Versus Euro

The pound rallied from a 14-month low versus the euro on speculation the Bank of England's move to ease the lending drought in the credit market today may alleviate the effect of the financial crisis on U.K. economic growth.

The pound gained to 1.4601 against the euro, from 1.4596 yesterday.

Turkey's lira, the best performer among emerging-market currencies versus the euro and dollar in the last six months, continued to gain even after the central bank unexpectedly lowered its benchmark interest rate by a quarter-percentage point to 17.25 percent today. The lira has jumped 13.4 percent versus the dollar and 7.8 percent against the euro the last six months.

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