Yen Rebounds From Two-Week Low; Japanese Exporters Buy Currency

By Kosuke Goto and Ron Harui

Sept. 19 (Bloomberg) -- The yen rebounded from a two-week low versus the dollar on speculation Japanese exporters bought the currency after the Federal Reserve cut its benchmark interest rate for the first time in four years.

``Japanese exporters appear to be buying the currency as the levels are attractive,'' said Masashi Kurabe, senior manager of foreign-exchange trading department at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. ``The interest-rate gap also has narrowed in favor of the yen.''

The yen rose to 115.89 per dollar at 11:51 a.m. in Tokyo from 116.08 yen in New York yesterday, when it fell to 116.38, the lowest since Sept. 5. It also climbed to 161.99 per euro from 162.29, climbing from the lowest in almost six weeks. The yen may advance to 161 per euro and 115.20 a dollar today, Kurabe said.

Japan's large manufacturers predict the yen will average 114.40 per dollar in the year started April 1, the central bank's Tankan survey showed in July, encouraging exporters to buy yen when it weakens. Futures contracts show traders are betting the Fed will cut its benchmark rate again by year-end, reducing returns on dollar deposits.

The dollar traded close to a record low against the euro after the Fed yesterday cut its target rate for overnight loans between banks by a half-percentage point to 4.75 percent as the worst housing slump in 16 years slows economic growth. The Bank of Japan will keep its benchmark rate at 0.5 percent today, according to a Bloomberg survey of economists.

`Sharp Declines'

Reports today will show U.S. housing starts dropped last month and a gauge of inflation slowed, according to separate Bloomberg News surveys of economists.

``We will see further sharp declines in the U.S. dollar,'' said Clifford Bennett, chief economist at Sonray Capital Markets Ltd. in Sydney. ``The 50-point cut suggests the Fed has garnered enough information of a real risk to a sharp economic slowdown. That's never good for a currency. Neither are rate reductions.''

The dollar traded at $1.3973 per euro after losing 0.8 percent yesterday, when it touched a record low of $1.3988. It also set a 30-year low of 98.80 U.S. cents per Canadian dollar. The U.S. currency has lost 5.5 percent this year versus the euro. The New York Board of Trade's Dollar Index, comparing the U.S. currency against six primary peers including the euro and yen, touched 79.157 yesterday, the lowest since September 1992.

Mutual Funds

Gains in the yen may be limited by speculation Japanese investors will send money overseas in search of higher yields.

Investment trusts will market more than 2 trillion yen ($17.3 billion) of mutual funds by month-end that aim to buy foreign assets, according to data compiled by Bloomberg.

``Our sales of investment trust funds are still doing fine,'' said Daisaku Ueno, a senior economist and currency analyst in Tokyo at Nomura Securities, Japan's largest brokerage. ``Japanese investors are sending money abroad constantly, stemming the yen's appreciation.''

The yen may fall to 120 per dollar by year-end, he said.

Japanese investors have 1,555 trillion yen in financial assets, up 2.9 percent from a year earlier, according to figures from the Bank of Japan released yesterday.

The yen strengthened against the Australian dollar, a favorite of so-called carry trades. The currency rose 0.2 percent to 98.74 per Australian dollar from 98.98 late in New York yesterday.

Rate Differential

Japan's yen rebounded after dropping against all 16 major currencies yesterday as U.S. stocks rallied, spurring investors to buy riskier assets funded by borrowed yen. Japan's Nikkei 225 Stock Average rose 3.4 percent.

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.

Australia's key rate is 6.50 percent and New Zealand's is 8.25 percent. The European Central Bank's benchmark is 4 percent.

U.S. reports today will show housing starts probably fell to an annualized rate of 1.35 million last month from 1.38 million a month earlier, while the consumer price index probably slowed to a 2.1 percent annual rate in August, from 2.4 percent in July, according to the median forecast in separate Bloomberg News surveys.

``Interest-rate differentials between the U.S. and Europe are certainly narrowing,'' said Nomura's Ueno. ``This will boost the euro against the dollar,'' to a record $1.40 this year, he said.

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