Yen Falls to Two-Week Low Versus Euro as BOJ Keeps Rates Steady

The yen fell to the lowest in two weeks against the euro on speculation the Bank of Japan is in no hurry to raise interest rates after leaving them unchanged today.

The yen also slid against all 16 of the most-actively traded currencies as a rally in global stocks gave investors confidence to borrow and sell the currency to buy higher- yielding assets in so-called carry trades. The Australian dollar surged to the strongest since 1996 on bets the nation's 5.75 percent interest-rate premium over Japan will widen.

``There's not going to be any hint of a near-term rate hike out of Japan,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney. ``While equity markets are stable and the momentum is in favor of carry trades, it will be hard for the yen to strengthen.''

The yen fell to 156.74 per euro at 2:36 p.m. in Tokyo from 156.33 yesterday in New York and touched 156.95, the weakest since March 1. Japan's currency reached 118.02 per dollar before trading at 117.89 from 117.53. It will weaken to 120 per dollar in a month, Masters forecast.

Governor Toshihiko Fukui and his policy board voted unanimously to keep the key overnight lending rate at 0.5 percent. Fukui is scheduled to meet the press from 3:30 p.m. in Tokyo.

Losses in the yen may accelerate should it weaken beyond 157.05 to 157.10 per euro, where traders have placed pre-set orders to sell it in case their bets go the wrong way, said Lee Wai Tuck, a currency strategist at Forecast Singapore Ltd.

Volatility on one-month yen options against the dollar fell to 9.23 percent from 10.03 percent on March 16, the highest since June 1. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of pricing options. Lower volatility may encourage carry trades as it exposes bets to less currency risk.

Strong Global Growth

The yen slid as the Morgan Stanley Capital International Asia Pacific Index of leading regional stocks added 0.6 percent, on course for a second day of gains as bourses in Hong Kong, Singapore and Japan advanced.

Japan's Nikkei 225 Stock Average and the yen had a correlation of -0.69 in the past six months, according to Bloomberg data, signaling gains in stocks are usually mirrored by losses in the currency.

``While there's a sense global growth remains strong and rates in Japan will only rise gradually, the argument is there to resume carry trades,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV. The yen may weaken to 157.25 per euro and 118 per dollar today, forecast Sydney-based Gibbs.

High Yielders

The Australian dollar surged above 80 U.S. cents for only the second day since 1996 to a decade-high of 80.33. The currency gained as much as 1.3 percent since Reserve Bank of Australia Assistant Governor Malcolm Edey said on March 16 inflation may be ``too high,'' signaling policy makers may raise the benchmark rate from 6.25 percent.

Rising interest rates in Australia, the U.K. and New Zealand have made their currencies beneficiaries of yen carry trades. The Bank of England's policy rate is 5.25 percent. Borrowing costs in New Zealand are at a record 7.5 percent.

Australia's currency rose to 94.39 yen, a three-week high and was last quoted at 94.18. The pound bought 229.39 yen from 228.49 and the New Zealand dollar bought 82.74 yen from 82.50.

U.S. Housing Market

The dollar may weaken on speculation data this week will show declines in U.S. home sales, adding to concern delinquencies among mortgage borrowers with poor credit histories will harm the economy and lead to interest-rate cuts.

Sales of existing homes fell 2.5 percent on month to an annual rate of 6.3 million units in February, according to the median estimate of economists in a Bloomberg News survey. The data are due on March 23.

The policy-setting Federal Open Market Committee will probably keep rates at 5.25 percent when it concludes a meeting tomorrow, according to a separate Bloomberg News survey. At its previous meeting on Jan. 30-31, the committee said ``signs of stabilization'' have appeared in the housing market.

``Bad numbers from the housing market raise the question of how much this will affect U.S. monetary policy,'' said Shinji Kobayashi, client manager in Tokyo at Resona Bank Ltd., a unit of Japan's fourth-largest lender. ``It's very possible for the Fed to acknowledge a weakening in housing. That will hurt the dollar,'' which may fall to $1.35 per euro and 116 yen this week.

source:www.bloomberg.com