Yen Gains Against Pound, Euro After Northern Rock Withdrawals

By Ron Harui and Kosuke Goto

Sept. 18 (Bloomberg) -- The yen rose against the British pound and the euro as withdrawals from the U.K.'s Northern Rock Plc added to concern losses in global credit markets will spread.

The currency strengthened most against the New Zealand and Australian dollars as investors reduced holdings of higher- yielding assets funded by loans from Japan, known as carry trades. The yen climbed for a second day against the dollar after E*Trade Financial Corp. yesterday slashed its profit forecast and Bank of America Corp. warned market turmoil will have a ``meaningful impact'' on earnings.

``Investors are becoming more risk-averse, leading to an unwinding of carry trades,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. ``The yen is being bought.''

The yen rose to 159.39 per euro at 11:55 a.m. in Tokyo from 159.64 late in New York yesterday. It climbed 0.3 percent to 228.86 versus the pound from 229.63 and advanced to 114.97 against the dollar from 115.12. The currency may reach 159.00 per euro and 114.60 versus the dollar today, Ishikawa said.

The yen gained for a third day against the pound as Northern Rock depositors lined up outside branches to withdraw savings, adding to 2 billion pounds ($4 billion) pulled from accounts since the Bank of England offered emergency funding last week.

Japan's currency gained 0.6 percent from yesterday in New York to 80.90 against the New Zealand dollar a favorite of the carry trade. It also advanced 0.3 percent to 95.65 versus the Australian dollar.

Carry Trades

In carry trades, investors borrow funds in a country with low interest rates and invest in one with higher borrowing costs, earning the spread between the borrowing and lending rate. The risk is that currency moves erase profits.

Japan's 0.5 percent benchmark borrowing cost helped weaken the yen 6 percent against the euro over the past 12 months. The rate compares with 4 percent in the euro region, 6.5 percent in Australia and 8.25 percent in New Zealand.

The dollar was little changed versus the euro on growing speculation the Federal Reserve is unlikely to cut borrowing costs by more than a quarter-percentage point today.

The U.S. currency has gained more than half a cent from an all-time low as investors trimmed bets the Fed will cut its overnight lending rate between banks by 0.5 percentage point to 4.75 percent. Interest-rate futures show a 50 percent chance of a half-percentage-point cut, compared with 76 percent a week ago.

``A 25 basis point rate-cut will lead to stock-selling in disappointment,'' said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. ``This will cause investor risk aversion, prompting dollar-buying and euro- selling. U.S. two-year Treasuries will be bought.''

Rate Advantage

The dollar traded at $1.3864 per euro from $1.3867 late yesterday in New York. It fell to a record low of $1.3927 on Sept. 13. The U.S. currency may rise to $1.3770 per euro today, Saito said.

U.S. two-year Treasuries yesterday yielded 0.09 percentage point more than comparable-maturity German securities, which held an advantage on Sept. 10.

The Fed will announce its decision at 2:15 p.m. in Washington. The odds of a quarter-percentage point rate cut rose to 50 percent yesterday from 24 percent a week earlier.

Before the decision, U.S. government reports will probably show producer prices dropped 0.3 percent last month following a 0.6 percent gain a month earlier, while foreign investors' net buying of U.S. financial assets slowed to $100 billion in July from $120.9 billion in June, according to separate Bloomberg news surveys of economists.

Temporary Catalyst

Europe's single currency fell for a second day against the yen on speculation the ZEW Center for European Economic Research's index of investor and analyst expectations declined to a nine-month low of minus 15 in September, according to the median of 40 forecasts in a Bloomberg News survey.

Signs of a weakening economy may prompt traders to place more bets the European Central Bank will pause raising interest rates. Investors cut wagers the ECB will lift borrowing costs this year, futures trading shows.

``Today's ZEW report will be a temporary catalyst for euro- selling before the FOMC meeting,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America in Tokyo.

The euro may fall to $1.36 against the dollar by the end of March, she said.

The yield on the three-month Euribor futures contract for December has fallen 15 basis points in the past week to 4.46 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999. A basis point is 0.01 percentage point.

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