Yen Rises as Investors Reduce Carry Trades on U.S. Growth Risks

Sept 11 -- The yen gained after Federal Reserve officials said credit market losses may slow the U.S. economy, prompting investors to sell higher-yielding securities funded by loans made in the currency.

The Japanese yen rose against 16 of the most-active currencies after Fed Governor Frederic Mishkin said he sees an ``important downside risk'' to the world's biggest economy and Fed Bank of San Francisco President Janet Yellen said she sees ``significant downward pressure.'' The yield spread between two- year U.S. and Japanese bonds narrowed to the least since January 2005, eroding demand for dollar-denominated assets.

``This is a yen-buying market,'' said Akihiro Tanaka, a senior dealer in Tokyo at Resona Bank Ltd. ``The yen is now very sensitive to any bad news'' on the U.S. economy, which has caused a reduction in carry trades.

The yen advanced to 113.52 against the dollar at 10:34 a.m. in Tokyo from 113.71 late in New York yesterday. It also strengthened to 156.50 per euro from 156.96. The currency may rise to 113 per dollar today, Tanaka forecast.

The Australian and New Zealand dollars, favorites of so- called carry trades, fell the most versus the yen from late yesterday in New York. Australia's dollar declined 0.3 percent to 93.62 yen from 93.92 yen, and New Zealand's dollar weakened 0.7 percent to 78.66 yen from 79.23 yen.

Carry Trade Died

``The yen carry trade has died,'' said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust & Banking Co. in Tokyo. ``It won't come back at least this year. The credibility of high-yielding currencies collapsed.''

The yen may rise to 113 per dollar and 153.50 a euro today, Amikura said.

In a carry trade, 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.

The yen also gained after the Cabinet Office in Tokyo said that machinery orders rebounded a seasonally adjusted 17 percent in July from the biggest slump in a year the previous month. The median estimate of 38 economists surveyed by Bloomberg News was for a 5 percent gain. Orders typically point to spending plans in three to six months.

`Ongoing Dollar Weakness'

The dollar traded near a record low versus the euro as traders raised bets the Fed will cut interest rates next week and the European Central Bank will boost borrowing costs by year-end.

The currency may fall for a fifth day against the euro as a government report today is forecast by economists to show the U.S. trade deficit expanded in July, adding to selling pressure on the dollar. Two-year Treasuries yield less than equivalent German bonds after giving up their premium last week for the first time in three years.

``We have ongoing dollar weakness ahead of the Fed meeting,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``With the Fed about to cut rates, possibly aggressively, and the ECB at least holding the line, it looks like the rate differential has moved in the euro's favor.'

The dollar traded at $1.3784 per euro from 1.3802. It reached a record low of $1.3852 on July 24 and may surpass that today, Morriss forecast.

U.S. two-year Treasuries yield 4 basis points less than similar-maturity German bunds and lost their advantage on Sept. 5 for the first time since September 2004.

A government report today may show the U.S. trade deficit widened to $59 billion in July, from $58.1 billion during June, according to the median estimate of 70 economists surveyed by Bloomberg News. A bigger shortfall signals the dollar may need to weaken to bolster exports and limit imports.

Interest-rate futures show a 76 percent chance the Fed will lower borrowing costs by half a percentage point to 4.75 percent from 5.25 percent at its Sept. 18 meeting. A month ago, traders were only looking for a quarter-point cut.

By Ron Harui and Kosuke Goto (Bloomberg)

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