Yen Heads for Second Weekly Gain on Stock Losses, Credit Risks

The yen headed for a second weekly gain versus the euro and dollar as concern over credit-market losses and falling stocks prompted investors to pare high- yielding assets funded by loans in Japan.

The yen has strengthened against the 16 most-actively traded currencies this week as traders pared so-called carry trades. Barclays Plc, the U.K.s third-largest bank, yesterday said it wrote down $2.7 billion of credit-related securities, and Wells Fargo & Co. said home-equity losses will remain elevated through 2008. U.S. Treasuries rallied, sending the yield on two-year notes to the lowest level since February 2005.

The yen has been strengthening a fair bit on that safe- haven play, said Jim Vrondas, manager of corporate business at online foreign-exchange dealer OzForex Ltd. in Sydney. The markets focus is on credit risk and weve seen scattered behavior during the week with big sharp drops in equity markets. Thats likely to continue in the short term.

The yen gained to 161.49 per euro at 8:45 a.m. in Tokyo from 162.48 late in New York on Nov. 9. The Japanese currency rose to 110.49 against the dollar from 110.69 last week. The euro bought $1.4619 from $1.4678.

Wells Fargos Chief Executive Officer John Stumpf yesterday said the current housing market is the worst since the Great Depression. Wells Fargo, based in San Francisco, is the second- largest U.S. mortgage lender.

The U.S. Dollar Index traded on ICE Futures U.S. in New York yesterday rose to 76.069, from 75.814 on Nov. 14. It has rebounded from 74.978 on Nov. 9, the weakest since the index began in 1973.

A Strong Dollar

U.S. Treasury Secretary Henry Paulson yesterday said the U.S. economy is going to continue to grow and its fundamental long-term strength is going to be reflected in our currency. A strong dollar is very much in our nations interest. He spoke to reporters traveling with him to Cape Town, South Africa, for the U.S.s Corporate Council on Africa conference.

Paulson, 61, is on a six-day trip to Africa that features a gathering of finance ministers and central bankers from the Group of 20 near Cape Town. The G-20 groups the largest developed countries, including the U.S. and Germany, with emerging markets such as China and India.

The Standard & Poors 500 Index fell 1.3 percent yesterday.

The yield on the two-year note fell 0.16 percentage point, and touched 3.33 percent, the lowest since February 2005.

The Swiss franc rose 0.4 percent this week to 1.6406 per euro.

Yen and Franc

The yen and the franc are used by investors to finance investments in markets with higher returns because interest rates in those countries are among the lowest in the industrialized world. Japans benchmark rate is 0.5 percent and Switzerlands is 2.75 percent. When risk aversion returned, investors bought the low-yielding yen and franc to pay back their loans, boosting demand for the currencies.

The pain from the credit market continues, said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon, the worlds largest custodial bank with more than $20 trillion in assets. We are continuing to see the highly anticipated aftershocks of the earthquake from the financial crisis, which forced people to cut risky assets and return to the yen and the dollar.

TIC Data

Gains in the dollar may be limited by speculation a report today will show foreign purchases of U.S. securities were less than the amount needed to finance the trade deficit, raising concern there is a lack of demand for the U.S. currency.

A Treasury Department report will show foreigners purchased $71.5 billion of U.S. assets in September from net sales of a record $69.3 billion in August, according to a Bloomberg News survey. A report on Nov. 9 showed the U.S. trade deficit was $56.5 billion in September.

Even though figures show a net inflow of foreign purchases of U.S. assets, that could be yet another dollar- selling catalyst, said Tohru Sasaki, chief strategist at JPMorgan in Tokyo and a former chief currency trader at the Bank of Japan. Unless figures rise above $56.5 billion, this could raise concern over the U.S. current-account deficit.

The U.S. currency may fall to as low as 109.50 yen today, Sasaki said.

International investors sold a record amount of U.S. securities in August as soaring credit costs sparked an exodus from the stock market, the Treasury Department said in Washington on Oct. 16, when the dollar fell 0.4 percent against the yen. None of the dozen economists surveyed by Bloomberg News predicted the decline, the first since Russia defaulted in 1998.

Source - Bloomberg