Yen Heads for Weekly Loss as Demand for Riskier Assets Resumes

By Kosuke Goto and Ron Harui

Sept. 14 (Bloomberg) -- The yen headed for the first weekly decline in three as investors resumed purchases of higher- yielding assets funded by loans made in Japan.

The Japanese yen fell against all 16 most-active currencies this week as global equities gained and a credit-market crisis eased in the U.S., prompting investors to re-enter so-called carry trades. The currency rose earlier today on media reports that Northern Rock Plc, the U.K.'s fourth-largest home lender, will receive emergency funds.

``The markets are calming down after the initial report of Northern Rock,'' said Masafumi Yamamoto, a currency economist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan trader. ``Investors' risk appetite has increased this week. This led to yen-selling.''

The yen traded at 114.99 per dollar at 11:55 a.m. in Tokyo from 115.08 late in New York yesterday and 113.38 on Sept. 7. It was also at 159.58 per euro from 156.10 a week ago. The yen may move between 113 and 117 per dollar next week, Yamamoto said.

Japan's currency rose against the pound today as the Bank of England will provide Northern Rock with a short-term credit line to keep it operating, the Financial Times said. The loan will be made at a ``punitive rate of interest,'' the British Broadcasting Corp. said. The yen rose to 232.10 per British pound from 233.07.

Asian Shares Gain

The Australian dollar, a favorite of carry trades, rose to 96.45 yen from 93.72 a week ago. New Zealand's dollar, also popular for carry trades, climbed to 81.92 yen from 78.36 on Sept. 7. The Standard & Poor's 500 Index climbed 0.8 percent yesterday and the Morgan Stanley Capital International Asia-Pacific Index of regional shares advanced 0.8 percent today.

Investment trusts will market more than 2.4 trillion yen ($21 billion) of mutual funds this month that aim to buy foreign assets, according to data compiled by Bloomberg. The odds the central bank will lift the overnight lending rate on Sept. 19 fell to zero percent this week, based on calculations by Credit Suisse Group using overnight interest-rate swaps.

``Sales of investment trust funds are not so bad,'' said Kei Katayama, who helps oversee the equivalent of about $1 billion at Daiwa SB Investments Ltd. in Tokyo. ``Japanese retail investors are still sending money abroad constantly, stemming an appreciation of the yen,'' which may fall to 118 per dollar by year-end, he said.

Interest-Rate Gap

Japan's 0.5 percent interest rate is the lowest among major economies. That compares with 4 percent in Europe, 5.25 percent in the U.S., 5.75 percent in the U.K., 6.5 percent in Australia and 8.25 percent in New Zealand.

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

One-month implied volatility for the yen rose to 11.70 percent today, from 11.38 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Higher volatility may discourage carry trades as it implies greater exchange-rate fluctuation risk.

The dollar may rise for a second day against the euro, rebounding from a record low before a U.S. report today that may show retail sales picked up in August, signaling consumer spending is holding up in the face of an economic slowdown.

Smaller Cut?

The U.S. currency is set to snap two weeks of losses versus the yen on speculation the U.S. economy is resilient to the subprime-mortgage crisis, backing the case for the Federal Reserve to lower interest rates by less than a half percentage point. The yield spread between two-year U.S. and Japanese bonds widened to 3.21 percentage points from 3.08 percentage points a week earlier.

``The report may show personal spending is solid and add to expectations the Fed won't have to cut rates by 50 basis points,'' said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. ``The dollar may strengthen'' to 115.65 yen and $1.3815 per euro today, he said.

The dollar trimmed this week's decline to 0.8 percent versus the euro to trade at $1.3877. The Commerce Department may say at 8:30 a.m. in Washington that retail sales rose 0.5 percent in August after a 0.3 percent increase the prior month, according to a Bloomberg News survey of economists.

Interest-rate futures show traders pared bets on a half percentage point cut by the Fed at the Sept. 18 meeting to 58 percent odds yesterday from a 76 percent chance a week ago.

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