Yen Trades Near One-Week Low Versus Dollar as Volatility Drops

Dec. 24 (Bloomberg) -- The yen traded near a one-week low versus the dollar as a drop in a gauge of currency swings increased the appeal of purchasing higher-yielding assets at the expense of the Japanese currency.

The yen declined against the euro, the Brazilian real and the Canadian dollar yesterday on speculation some investors returned to carry trades. Britain’s pound approached the record low against the euro as reports showed the economy shrank more than originally projected in the third quarter and mortgage-loan approvals slumped.

“We have a slightly better tone for buying the dollar- yen,” said Matthew Kassel, director of proprietary trading at ING Financial Markets LLC in New York.

The yen traded at 90.97 per dollar at 7:03 a.m. in Tokyo, after falling 0.8 percent yesterday when it touched 90.92, the weakest level since Dec. 15. The yen has declined from a 13-year high of 87.14 set on Dec. 17. The Japanese currency was at 126.64 per euro, following a 0.7 percent decline yesterday. The dollar was little changed at $1.3922 per euro. It dropped to $1.4719 on Dec. 18, the weakest level since Sept. 25.

The pound declined 0.8 percent to 94.77 pence per euro yesterday as the U.K.’s Office for National Statistics said the economy shrank 0.6 percent in the third quarter, the most since 1990. It fell to 95.57 pence on Dec. 18, the all-time low since the 15-nation European currency’s debut in 1999.

The pound has lost almost a quarter of its value against the currencies of the U.K.’s biggest trade partners this year, according to the Bank of England’s effective exchange rate. Sterling may weaken to parity with the euro for the first time as early as next week, according to Bank of New York Mellon Corp.

Implied Volatiity

The yen depreciated 1.2 percent to 38.16 against the Brazilian real yesterday and fell 0.9 percent to 74.55 versus the Canadian dollar on increased demand for carry trade where investors sell the low-yielding currencies and use the proceeds to buy higher-yielding assets. The Bank of Japan cut its benchmark interest rate last week to 0.1 percent from 0.3 percent. Brazil’s main rate is 13.75 percent and Canada’s rate is 1.5 percent.

Implied volatility on one-month euro-yen options touched 22.29 percent yesterday, the lowest level since Oct. 21. Lower volatility increases the appeal of carry trades by making profit from interest-rate differentials more predictable.

The Japanese yen has gained 23 percent against the dollar this year, heading for its largest annual increase in more than two decades amid speculation the credit crisis will deepen. It rose 28 percent against the euro and 66 percent versus the pound.

‘Extreme Risk Aversion’

“I can see the yen coming off the highs as the market moves away from extreme risk-averse tones,” said Mark Frey, head trader in Victoria, British Columbia, at Custom House, a currency brokerage with 50,000 corporate accounts.

The U.S. dollar fluctuated between a loss and a gain yesterday, as investors balanced their trading positions before year-end, said Dustin Reid, director of currency strategy at RBS Global Banking & Markets in Chicago.

The dollar fell to a three-month low versus the euro last week as the Federal Reserve cut the target lending rate to between zero and 0.25 percent from 1 percent, and said it may keep rates low for “some time” while considering potential benefits of buying longer-term Treasury securities.

“In the short term, we’ve found the equilibrium,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “Eventually, the European economy will have more trouble. There’s a motive to sell the euro when the New Year begins.” The dollar may rise to $1.30 per euro in the next few months, according to Galy.

For the year, the dollar strengthened 4.1 percent against the euro, 34 percent versus the British pound and 28 percent against the Australian dollar as investors sold riskier assets and repay dollar-denominated loans.