Yen Falls as BOJ May Delay Rate Increase
Finotec | Sep 02, 2007 08:00PM ET
The yen fell against the 16 most- active currencies on speculation the central bank will delay raising interest rates, prompting investors to buy higher- yielding currencies with money borrowed in Japan.
The currency fell the most against the Australian dollar after a Japanese government report indicated a slump in business spending, prompting fund managers to resume so-called carry trades. Data from Australia, where the benchmark rate is 6 percentage points higher, showed an unexpected gain in home building.
``It's becoming easier to sell the yen,'' said Takuma Kurosawa, global markets treasurer at HSBC Bank in Tokyo. ``Many of the world's central banks have to remain hawkish to stem inflation. Hedge funds may gradually return to the carry trade.''
Trading will be ``about 60 percent'' of the average as U.S. markets are closed today for a holiday, said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney.
Traders are betting the Reserve Bank of Australia will raise the benchmark rate from 6.5 percent in the next year, according to a Credit Suisse Group index based on trading in interest-rate swaps. The yen has fallen 7.7 percent against the Australian dollar as the central bank raised rates four times from August 2006. Australia's home-building approvals reached a five-month high in July.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.
The dollar may fall on speculation the Federal Reserve will lower its benchmark rate of 5.25 percent when it meets Sept. 18. Chairman Ben S. Bernanke said at the end of last week a further tightening in credit could worsen a slump in the housing market. The dollar has fallen against 15 of the 16 most-active currencies since the Fed on Aug. 17 lowered the discount rate it charges banks for loans by 50 basis points to 5.75 percent.
The euro may weaken for a third day against the yen on speculation the European Central Bank will skip raising rates this week amid concern the credit-market crisis will erode earnings in Europe's finance industry.
``With the ECB keeping rates on hold this week, there is no reason to buy the euro actively,'' said Masamichi Koike, joint general manager of the trading department in HSBC. Traders pared bets the ECB will increase borrowing costs. The implied yield on the December Euribor interest-rate contract fell to 4.50 percent, from 4.545 percent on July 24, when the euro rose to a record high of $1.3852. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB key rate since 1999.
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