Yen Near 1 1/2-Year High Versus Dollar on Credit-Market Risks

The yen traded near a 1 1/2-year high versus the dollar as concern increased that credit-market losses will slow global economic growth, pushing investors to sell higher-yielding assets funded by loans in Japan.

Japan's currency rose against the Australian and New Zealand dollars, favorites of the carry trade, after stocks fell in the U.S. and futures showed equities in Tokyo are likely to decline today. Japan has the lowest benchmark interest rate among industrialized nations. Demand for the dollar may weaken on expectations a government report today will show U.S. housing starts dropped to a 14-year low in October.

This will be a good day for the yen, said Paul Milton, chief dealer at Societe Generale SA in Sydney. Asian stocks are likely to catch up with U.S. equities.

The yen traded at 109.74 per dollar at 7:57 a.m. in Tokyo from 109.76 late in New York yesterday. The yen rose to 109.13 per dollar on Nov. 12, the highest level since May 2006, and may advance to 109.30 today, Milton said. Japan's currency was little changed at 160.96 per euro from 160.95 yesterday. The dollar traded at $1.4664 per euro from $1.4665.

The yen climbed against all 16 of the world's most-active currencies yesterday as Goldman Sachs Group Inc. said in a report that Citigroup Inc., the largest U.S. bank by assets, may write down $15 billion in collateralized debt obligations over the next two quarters.

The Standard & Poor's 500 Index fell 1.8 percent yesterday. Nikkei 225 Stock Average futures due in December traded at 14,765 in Chicago, compared with the index's close yesterday in Tokyo of 15,042.56. The two-year Treasury note's yield fell to the lowest since 2005 as investors sought safety in U.S. government debt.

Yen Strength

The market is very nervous, said Jonas Thulin, a senior currency strategist at Calyon Securities Inc. in New York. People are holding a sober view that we haven't seen the worst from the subprime and credit issue yet. It pushed people to buy the yen and sell risky assets.

The yen has strengthened against all 16 most-traded currencies this month, gaining 12 percent versus Australia's dollar and 8.3 percent against New Zealand's.

In carry trades, investors borrow money in low-yielding economies such as Japan and lend the funds in high-yielding countries to profit from the spread. The risk is that currency moves wipe out earnings. When the trade weakens, traders sell higher-yielding assets and buy yen to repay borrowings.

The benchmark rate in Australia is 6.75 percent while New Zealand's is 8.25 percent. Japan's borrowing cost is 0.5 percent.

Jitters in the market contributed to the strengthening in the yen, said Stephen Malyon, a currency strategist at Scotia Capital Inc. in Toronto.

U.S. Housing Starts

The U.S. currency weakened to an all-time low of $1.4752 per euro on Nov. 9. The dollar has lost 10 percent against the euro and 7.8 percent versus the yen this year as two rate cuts by the Federal Reserve dimmed the allure of U.S. assets.

Today's Commerce Department report will show housing starts fell to an annualized rate of 1.17 million in October, from 1.19 million during September, according to a Bloomberg survey. The data is scheduled for release at 8:30 a.m. Washington time.

The Fed is scheduled to release the minutes from its Oct. 31 meeting at 2 p.m. in Washington. The central bank cut the target rate for overnight loans between banks to 4.5 percent last month, after a 50-basis-point reduction in September. The central bank is also expected to release quarterly forecasts for the economy and inflation.

Futures traded on the Chicago Board of Trade show the odds of the Fed cutting interest rates a quarter-percentage point to 4.25 percent on Dec. 11 are 96 percent, compared with 72 percent a month ago.

Spread Narrows

The National Association of Home Builders/Wells Fargo index of builder confidence held at 19 for a second month in November, the lowest since records began in 1985, the Washington-based association said yesterday.

The yield advantage of U.S. two-year Treasuries over comparable-maturity Japanese government debt shrank to 2.41 percentage points, the narrowest since October 2004, making U.S. assets less attractive to international investors.

Source - Bloomberg