Yen Rises for a Third Day as Investors May Unwind Carry Trades

The yen strengthened for a third day as declines in emerging market bonds and stocks prompted investors to pare holdings of higher-yielding assets funded by loans in the currency.

Japan's yen rose against riskier currencies including the Indonesian rupiah and Malaysian ringgit after Finance Minister Koji Omi yesterday stressed the risk of one-way foreign-exchange bets. The two currencies are the worst performers this month in Asia. The Morgan Stanley Capital International Asia-Pacific index of leading regional shares fell by the most in almost three weeks.

``Concern about declines in Asian equities are a good chance to unwind bets for yen weakness,'' said Nobuo Ibaraki, deputy general manager of foreign exchange at Nomura Trust & Banking Co. Ltd., a unit of Japan's largest brokerage. Traders are wary of selling the yen following comments from Japanese officials.''

The yen rose to 165.28 per euro at 1:15 p.m. in Tokyo from 165.83 late in New York yesterday. Japan's currency climbed to 123.00 per dollar from 123.26. It may rise to 165 per euro and 122.70 against the dollar today, Ibaraki said.

The Standard & Poor's 500 Index is set for the biggest monthly loss in more than a year. Reports showing house prices slumped in April by the most in at least six years and consumer confidence waned added to concern spurred by losses in the market for mortgage-backed bonds. The S&P 500 dropped for a third day yesterday and has fallen 2.5 percent this month.

The VIX volatility index, a Chicago Board Options Exchange gauge reflecting traders' expectations of stock market volatility, yesterday rose to 18.9, the highest since March 14. Japan's Nikkei 225 Stock Average fell for a fourth day, by 0.7 percent.

A Dog

Gains in the yen may be limited by speculation fund managers will convert it into foreign currencies as they prepare to launch investment trusts composed of overseas assets.

Finance companies will market more than 1 trillion yen ($8.1 billion) of foreign-currency investment trusts before the end of June, according to data compiled by Bloomberg. Japan's benchmark rate is the lowest in the industrialized world, reducing the appeal of domestic assets.

``We're going to see carry trades for a long time,'' Gabriel de Kock, chief currency economist in New York at Citigroup Global Markets, said at a conference on foreign exchange in Singapore. ``The yen will be a dog for a long time.''

The yen will drop to 125 per dollar by year-end as Japan's 0.5 percent rate encourages investor outflows, said Daisaku Ueno at Nomura Securities Co.

Narrow Range

The narrowest monthly trading range in more than six years in April will prompt Japanese investors to seek higher-yielding foreign assets, pushing down the yen, Ueno said.

The yen that month traded within the smallest band since Oct. 2000, according to data tracked by Bloomberg. The spread between the high of 117.41 yen on April 2 and the low of 119.87 yen on April 16 was 2.46 yen. The range in May was 2.90 yen. The currency this month has had the range of 3.36 yen.

``Dollar-yen doesn't move as it used to,'' said Ueno, who in March was named best foreign-exchange analyst in the 19th annual Nikkei analyst rankings. ``In such a situation, the yen carry trade is likely to prevail. The yen's weak trend won't change.''

The dollar also declined against the yen on a report that's likely to show U.S. durable goods orders fell 1 percent last month, the most since January, after rising a revised 0.8 percent in April, according to the median forecast of 73 economists surveyed by Bloomberg.

``There's a real risk that we continue to see U.S. data disappoint,'' said Jonathan Cavanagh, a currency strategist at Westpac Banking Corp. in Sydney. ``The dollar has further to go on the downside.''

`Euro Looks Bearish'

The euro's rally from a June 13 low may stall, according to technical charts traders use to predict currency movements, said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo.

The failure of the euro to sustain a break above so-called resistance at $1.3470 for the three previous days suggests further gains may be limited, Saito said. Resistance is a level where sell orders may be clustered.

``The euro looks bearish on the charts,'' he said. ``The euro may pull back to $1.3400 today,'' from $1.3436.

The $1.3470 level represents a 50 percent retracement of the euro's fall to the June 13 low from the April 27 high of $1.3681, based on a series of numbers known as the Fibonacci sequence.

Other Fibonacci points are 61.8 percent and 76.4 percent. A break of one indicates a currency may move to the next, while a failure suggests a trend may stall.

source:bloomberg.com