Yen Falls to Record Low Against Euro as Fed Reduces Volatility
By Stanley White and Kosuke Goto
June 26 (Bloomberg) -- The yen fell to a record low against the euro as a decline in currency volatility encouraged investors to buy higher-yielding assets funded in Japan.
The yen also slid to a seven-month low versus Australia's dollar as Asian stocks gained for the first time in six days, giving investors confidence to enter so-called carry trades. Volatility implied by yen options against the dollar approached a six-month low after the Federal Reserve gave no indication it will increase interest rates. The dollar was near the lowest in more than two weeks against the euro as traders pared bets on higher U.S. borrowing costs.
``Dwindling expectations of an early Fed rate increases granted a respite to calm down the markets,'' Mitsuru Sahara, senior currency sales manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's second-biggest lender, said in an interview with Bloomberg Television. ``With currency volatility falling, the yen carry-trade environment is likely to prevail.''
The yen fell to 169.34 per euro, the weakest since the currency's debut in 1999, before trading at 169.25 as of 6:11 a.m. in London from 168.90 yesterday. Japan's currency stood at 107.92 versus the dollar from 107.80. The dollar was at $1.5685 per euro after dropping yesterday to $1.5686, the lowest level since June 9. Japan's currency may fall to 108.40 per dollar today, Sahara forecast.
Against the Australian dollar, the yen declined to a seven- month low of 103.64 from 103.48 late yesterday in New York. It fell to 213.08 per British pound from 212.93 as the MSCI Asia Pacific Index of regional shares gained 0.6 percent.
Implied Volatility
Volatility implied by dollar-yen options expiring in one month fell to 10.11 percent from 10.46 percent yesterday. It reached a six-month low of 10.01 percent on June 19. Traders quote the measure of expectations for future currency swings as part of pricing options.
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. Japan's benchmark rate of 0.5 percent is the lowest among major economies.
Lower volatility reduces the risk that exchange-rate moves will erode the profit from investing overseas.
The euro gained for a third day against the yen as the extra yield German 10-year government bonds offer over similar- maturity Japanese bonds widened to 2.94 percentage points, the most since February 2004.
ECB Rates
The euro advanced after ECB President Jean-Claude Trichet told the European Parliament in Brussels yesterday that he's leaving open the option of raising the region's 4 percent benchmark interest rate again to contain accelerating inflation.
``The ECB will raise rates in July for sure,'' said Takahide Nagasaki, senior currency strategist in Tokyo at Daiwa Securities SMBC Co., a unit of Japan's second-largest brokerage. ``In Japan, it's still hard to do so. The widening interest-rate gap will push down the yen against the euro to 170.''
Traders raised wagers the ECB will increase borrowing costs. The implied yield on the December Euribor futures contract climbed to 5.27 percent from 5 percent at the end of May.
Investors reduced bets the BOJ will raise borrowing costs this year. The odds of a Bank of Japan rate increase fell to 37 percent from 92 percent on June 11, interest-rate swaps show.
Japan's central bank shouldn't predetermine the direction of monetary policy, BOJ board member Seiji Nakamura said at a speech today in Asahikawa, northern Japan.
Fed Impact
The dollar bought 1.0351 Swiss francs, near a two-week low of 1.0305 francs, as traders reduced bets the U.S. central bank will raise its target lending rate by a quarter-percentage point in September. Policy makers said yesterday in the statement announcing the decision to hold the fed funds target at 2 percent that ``uncertainty'' about the inflation outlook is high.
``The trend is to sell the dollar,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``As worried as the Fed is about inflation, weakness in many parts of the economy means it won't be able to raise rates as soon as it might like.''
The U.S. currency may fall to $1.57 per euro and 107.30 yen today, he forecast.
Futures on the Chicago Board of Trade show a 66 percent chance the central bank will leave its target rate for overnight lending between banks unchanged at its September meeting, compared with 10 percent odds yesterday. There's a 94 percent chance the Fed will keep rates on hold at the next meeting in August, the contracts show.
Inflation Gauge
The Fed's preferred gauge of inflation, which excludes food and fuel costs, was unchanged at 2.1 percent last month, according to the median forecast of 26 economists surveyed by Bloomberg News. The Commerce Department will deliver its report tomorrow. Policy makers including Fed Chairman Ben S. Bernanke have said they prefer core inflation to be below 2 percent.
The U.S. currency has dropped 12 percent against the euro since Sept. 18, when the Fed made the first of seven reductions in the target lending rate. The dollar touched $1.6019 per euro on April 22, the weakest level on record.
The euro's advance may stall at $1.5726 against the dollar, said Yuji Saito, head of foreign-exchange sales at Societe Generale SA, citing charts traders use to predict price movements.
The so-called resistance level of $1.5726 represents the upper side of a Bollinger band with a 21-day moving average, said Tokyo-based Saito. Resistance is a level where sellers are expected to outweigh buyers.
Bollinger bands are two standard deviations above and below the average price of a currency or security over the past 20 or 21 days. A standard deviation on a Bollinger band chart measures how tightly prices are clustered around the mean.
-- With reporting by Junko Kikkawa in Tokyo. Editors: Chris Young, Nicholas Reynolds
To contact the reporters on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Kosuke Goto in Tokyo at kgoto2@bloomberg.net.
Last Updated: June 26, 2008 01:46 EDT
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