Yen Trades Near Record High Against Pound Amid Risk Aversion

Jan. 23 (Bloomberg) -- The yen traded near a record high against the British pound and the strongest level since 1995 versus the dollar as concern the global slowdown will worsen spurred investors to take refuge in Japan’s currency.

Sterling fell toward a 23-year low versus the dollar and traded near the weakest in two weeks against the euro before a U.K. report that may show Britain’s economy shrank in the fourth quarter by the most since 1990. The euro headed for a fourth weekly loss against the dollar before a European report that economists say will show manufacturing and service industries contracted for an eighth month in January.

“The U.K. and the eurozone seem to be the worst off among the major economies,” said Satoshi Tate, a senior vice president in the foreign-exchange division in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s second-largest publicly traded bank. “Risk aversion is still prominent among some investors, so the yen is likely to remain a haven currency.”

Japan’s currency traded at 123.45 per pound as of 8:50 a.m. in Tokyo, after advancing to a record 119.42 on Jan. 21. The yen was at 88.98 versus the dollar following a rally to 87.13 on Jan. 21, the strongest level since July 1995. The yen traded at 115.74 per euro after appreciating to 112.12 on Jan. 21, the highest since March 2002.

The pound traded at $1.3875 from $1.3877 in New York yesterday, after falling to $1.3622 on Jan. 21, the weakest since 1985. Against the pound, the euro was at 93.74 pence from 93.70 pence yesterday, when it reached 94.67 pence, the strongest since Jan. 5. The euro was little changed at $1.3006, after declining to $1.2825 on Jan. 21, the lowest in six weeks.

Carry Trade

The yen has strengthened against all of the 16 most-active currencies this week, rising 5.7 percent to 46.89 against New Zealand’s dollar and 4.9 percent to 58.21 versus Australia’s dollar. Investors tend to purchase the yen in times of market turmoil because of Japan’s current-account surplus and low interest rates.

Benchmark interest rates are 4.25 percent in Australia and 5 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher rates. The risk is that currency market moves erase those profits.

The British currency lost 5.7 percent versus the dollar and 3.9 percent against the euro this week as the U.K. government’s plan for a second bank bailout in three months raised concern that the financial crisis is worsening and the budget deficit is widening.

‘Credit Concerns’

“There’s a lot of credit concerns that have been driving the pound down,” said Jeffrey Hough, a vice president and currency options trader at Societe Generale in New York. “Until things are clearer, I expect this trend to continue. The financial system isn’t going to be rectified any time soon.”

The slide indicates investors are betting Britain will lose its AAA credit rating, Merrill Lynch & Co. strategists including London-based Emma Lawson wrote in a report yesterday.

Britain’s gross domestic product may have contracted 1.2 percent in the fourth quarter from the previous three months, according to a Bloomberg News survey of economists before today’s report from the Office for National Statistics.

“The general economy is really weighing on the pound,” said Terry Joyce, senior vice president of foreign exchange in Birmingham, Alabama, at Regions Financial Corp., the state’s biggest bank. “The pound’s just waiting to see what the government is going to do as far as how nationalized it’s going to make the banking institutions.”

The euro headed for a third weekly loss versus the yen as a composite index of Europe’s manufacturing and service industries dropped to 37.4 in January, the lowest since the survey began in 1998, according to a Bloomberg News survey of economists.

The index, which is based on a survey of purchasing managers by Markit Economics, will be released at 9 a.m. in London. A reading below 50 indicates contraction.