Yen May Extend Drop as Central Banks Slash Rates to Spur Growth

Dec. 3 (Bloomberg) -- The yen may decline for a second day against the euro on speculation interest-rate cuts world wide will stem an economic slump, reducing the appeal of the currency as a safe haven.

The yen may also fall against the Australian and New Zealand dollars on speculation a rally in U.S. stocks will spread to Asian shares, encouraging purchases of higher-yielding assets funded with currencies where interest rates are lower.

“Central bank rate cuts could ease investors’ aversion to risk and lead to a weaker yen,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Traders may also take their cue from stock markets and purchase higher-yielding currencies.”

The yen traded at 118.56 per euro at 8:09 a.m. in Tokyo from 118.44 late yesterday in New York, when it fell 0.8 percent. The yen was little changed at 93.28 against the dollar, compared with 93.18. The euro was quoted at $1.2716 from $1.2714. The yen may decline to 119 per euro today, Ishikawa said.

Central bankers will lower interest rates by 1.5 percentage points to 5 percent in New Zealand, 1 percentage point to 2 percent in the U.K. and a half-percentage point to 2.75 percent in the euro region this week, according to the median forecasts of analysts surveyed by Bloomberg.

Yen Versus Rand

The yen depreciated 0.7 percent to 9.1227 versus the rand on speculation investors will slow the unwinding of carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher.

The Bank of Japan kept its target lending rate at 0.3 percent yesterday, compared with 12 percent in South Africa.

The Standard & Poor’s 500 Index rose 4 percent yesterday, a day after the biggest rout since mid-October. Europe’s Dow Jones Stoxx 600 Index gained 1.7 percent.

“We’re seeing tentative improvement in market sentiment,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “I don’t think this represents a new trend. The trend is continued difficulty for the global economy and financial markets, leading to further strength of the dollar and the yen.”

ADP Employer Services may report today that companies in the U.S. cut 205,000 jobs last month, following a reduction of 157,000 in October, according to the median forecast of 22 economists surveyed by Bloomberg News. The report is due 8:15 a.m. New York time.

Payroll Report

Payrolls including government employees shrank by 325,000 workers in November, the biggest one-month drop since the 2001 terrorist attacks, according to the median forecast of economists before the Labor Department’s Dec. 5 report.

Foreign-exchange funds had their biggest monthly returns in October since 2003 as investors sold higher-yielding assets and bought the U.S. dollar, Parker Global Strategies LLC said yesterday. Currency funds gained 2.53 percent, according to the Stamford, Connecticut-based firm, whose Parker FX Index tracks 68 firms managing more than $36 billion in assets.

Federal Reserve Chairman Ben S. Bernanke said on Dec. 1 he may use less conventional policies, such as buying Treasury securities, to revive the economy because there is limited room to lower the target lending rate from the current 1 percent.