Yen Reaches 4 1/2-Year Low Against Dollar; Carry Trades to Rise

The yen headed for a second losing week against the dollar, reaching a 4 1/2-year low, as investors borrowed Japan's currency to buy higher-yielding assets in the U.S., New Zealand and Australia.

Japan's currency this week fell to a record low versus the euro, the weakest since September 1992 against the British pound and a two-decade low versus New Zealand's dollar, after the Bank of Japan said it will raise borrowing costs slowly.

``The yen is pretty weak,'' said Satoru Ogasawara, foreign exchange analyst and economist at Credit Suisse Group in Tokyo. ``Interest-rate differentials remain high between major countries and Japan. The carry trade may remain for some time.''

The yen dropped to 123.78 against the dollar at 8:48 a.m. in Tokyo, the lowest since Dec. 12, 2002, from 123.72 yesterday in New York. Against the euro, it was at 165.70 from 165.67 late yesterday and a record low of 166.12 on June 19.

Deputy Governor Toshiro Muto said this week the Bank of Japan will raise rates gradually and that while prices will rise in the long run, it's difficult to expect rapid gains. The 0.5 percent benchmark is the lowest in the industrialized world.

European Central Bank board member Lorenzo Bini-Smaghi said interest rates are still accommodative and there are upward risks to price stability, the Nihon Keizai newspaper reported today. The ECB's benchmark is 4 percent.

Bank of England Governor Mervyn King and three other policy makers voted to raise rates from 5.5 percent at their last meeting June 6-7, minutes released June 20 showed. The remaining five members voted to leave borrowing costs unchanged.

Investment Trusts

The yen was on course for a second week of losses against the pound, at 246.56 from 243.95 last week. Against the New Zealand dollar, the yen headed for a fourth week of declines, the longest losing streak since April 20. It was last quoted at 94.49 from 94.40 yesterday.

Japanese finance companies will market more than 1.5 trillion yen ($12.1 billion) of foreign-currency investment trusts before the end of June, according to data compiled by Bloomberg. The funds are aimed at individual investors who want to seek out assets with higher yields.

``Market sentiment is to sell the yen, because Japan's interest rates are so low,'' said Osao Iizuka, head of foreign exchange trading at Sumitomo Trust & Banking Co. in Tokyo. ``As we approach the end of this month, we'll see more yen-selling orders related to investment trusts.''

The yen may fall to 123.90 against the dollar today, he said.

source:bloomberg.com