BL/Yen Declines for Sixth Day as Stock Rally Boosts Carry Trades
By Kosuke Goto
April 21 (Bloomberg) -- The yen fell for a sixth day against the euro, the longest losing streak in two months, as a rally in stocks gave investors confidence to buy higher-yielding currencies with funds from Japan.
The currency slid versus the New Zealand and Australian dollars, favorites for so-called carry trades, as Japan's Nikkei 225 Stock Average advanced. The yen traded near a seven-week low against the dollar as U.S. stocks rallied after better-than- expected results from Citigroup Inc.
``A rally in stocks is reducing risk aversion among investors,'' said Seiichiro Muta, director of foreign exchange in Tokyo at UBS AG, the world's second-largest currency trader. ``There is optimism financial firms are swimming well in rougher seas. The yen carry trade is increasing, pushing down the yen.''
The yen declined to 164.42 per euro at 9:22 a.m. in Tokyo, from 163.96 in New York on April 18, when it reached 164.68, the lowest level since Dec. 31. The currency dropped to 103.94 per dollar from 103.67. The dollar was little changed at $1.5817 per euro. Japan's currency may fall to 165.50 a euro today, Muta forecast.
The yen weakened to 82.29 per New Zealand dollar from 81.90, and to 97.15 versus the Australian dollar from 96.89. The Nikkei 225 Stock Average advanced for a fifth-straight day, rising 1.2 percent. Japan's benchmark rate of 0.5 percent compares with 7.25 percent in Australia and 8.25 percent in New Zealand.
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread. The risk is that currency fluctuations erase the profit.
Falling Volatility
Implied volatility on options for the six most active currencies against the dollar fell to 11.28 percent on April 18, from 11.69 percent on April 16, according to an index compiled by JPMorgan. The gauge of price swings touched a decade high of 14.48 percent on March 17, a level at which the G-7 bought the dollar to check its decline in a coordinated move in 1995.
Deutsche Bank AG and UBS AG, the two biggest currency traders, say the decline in volatility means the likelihood of central banks buying or selling currencies in concert to halt the dollar's slide has diminished even with the greenback at record lows. Group of Seven finance ministers are less concerned about the currency's relative value than the risks from ``sharp fluctuations'' in exchange rates, their April 11 statement shows.
``It's not about levels but the volatility,'' said Geoffrey Yu, a foreign-exchange strategist in Zurich at UBS. ``If the dollar drops in a gradual fashion, they are unlikely to act.''
Dollar Index
The Dollar Index traded on ICE futures in New York, which tracks the currency against those of six trading partners, traded at 71.969, from 72.012 on April 18. The U.S. currency traded at $1.9994 against the British pound from $1.9979, and was little changed at 1.0179 versus the Swiss franc from 1.0335.
Futures traders increased their bets that the yen will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed on April 18.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 47,972 on April 15, compared with net longs of 43,067 a week earlier. The number is sometimes seen as a contrary indicator.
``Yen longs had increased before major financial institutions' earnings reports in the U.S.,'' Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc in Tokyo and a former Bank of Japan official, wrote in a research note today. Because the market had priced in bad results, long positions were unwound, he said.
To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net.
Last Updated: April 20, 2008 20:44 EDT
Your World Is As BIG as You Make It!!!
AI
