Wednesday, December 10, 2008

Yen Trades Near 7-Week High as Global Slump Crimps Carry Trade

Dec. 10 (Bloomberg) -- The yen traded near a seven-week high against the dollar on speculation a global economic slump and doubts about a bailout for U.S. automakers will increase the appeal of Japan’s currency.

The yen may also advance against the euro on speculation U.S. stock declines will spread to Asia, prompting selling of higher-yielding assets. U.S. Democrats backed off a prediction that Congress would approve a $15 billion automaker bailout within 48 hours due to objections from Republicans. General Motors Corp. and Chrysler LLC may not have strong enough collateral for the Federal Reserve to lend to them, Chairman Ben S. Bernanke said in a letter to lawmakers Dec. 5.

“I’m looking for the yen to grind higher on risk aversion,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. Ltd., a unit of Japan’s largest brokerage. “Weak stock markets support yen gains. A lack of consensus on a bailout for U.S. carmakers also contributes to a sense of uncertainty.”

The yen traded at 92.21 per dollar as of 8:41 a.m. in Tokyo from 92.13 yesterday. It rose to 91.60 on Dec. 5, the highest since Oct.24. Against the euro, the yen was at 119.16 from 119.07. The euro bought $1.2923 from $1.2927. The yen may rise to 91 per dollar today, Amikura said.

U.S. Stocks

The Standard & Poor’s 500 lost 2.3 percent yesterday, halting a two-day advance, after companies from FedEx Corp. to Danaher Corp. forecast earnings that disappointed investors as the deepening recession crimps sales.

Senate Majority Leader Harry Reid said the Senate is unlikely to vote tonight in the U.S. on extending government loans and that lawmakers may have to stay in session over the weekend. General Motors and Chrysler say they need at least $14 billion in combined aid to keep from running out of cash by early next year.

“The Federal Reserve would be extremely reluctant to extend credit where Congress has actively considered providing assistance but, after due consideration, has decided not to act,” Bernanke said in the letter, a copy of which the Senate banking panel forwarded to Bloomberg yesterday.

The yen has gained this year against all 178 currencies tracked by Bloomberg News on speculation the global economic slump and interest-rate cuts will prompt investors to unwind carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.3 percent target rate is the lowest among developed nations.

Annual Gain

Japan’s currency appreciated 21 percent versus the dollar, 37 percent against the euro and 73 percent versus New Zealand’s dollar this year. It’s headed for its first annual gain versus Brazil’s real, the euro and the New Zealand dollar in at least six years.

“Deleveraging is not fully done in the financial industry yet,” said Benedikt Germanier, a currency strategist in Stamford, Connecticut, at UBS AG, who predicted the yen may appreciate to 90 per dollar in a month. “The yen still has buying potential.”

The stronger yen has eroded Japanese exporters’ revenue. Sony Corp, the world’s second-biggest consumer-electronics maker, said yesterday it plans to eliminate 16,000 jobs. It said on Oct. 23 that net income will probably drop 59 percent in the year ending March 31.

The dollar has gained 35 percent versus the pound this year and 13 percent against the euro as the credit-market seizure and $980 billion of losses on mortgage-related securities worldwide led investors to repatriate overseas investment to the U.S. and seek shelter in Treasuries.

Treasury Demand

Demand for U.S. government debt pushed the yield on the 10- year note to 2.65 percent today. It reached 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Federal Reserve’s daily records began.

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, rose 0.3 percent to 85.84 yesterday. It touched 88.463 on Nov. 21, the highest since April 2006.

“Right now the dollar has become less competitive, and that’s going to make the recession deeper and longer until the dollar turns around,” said Martin Feldstein, a Harvard University economics professor, in an interview on Bloomberg Radio. “Part of the way we get out of this recession eventually is going to be a more competitive dollar.”

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