Yen Rises as Subprime Losses Spur Higher-Yielding Asset Sales

The yen rose against 16 of the most- actively traded currencies as losses related to U.S. subprime mortgages widened, prompting investors to sell higher-yielding assets funded by loans made in Japan.

The currency gained the most versus the Australian and New Zealand dollars as Freddie Mac, the second-biggest U.S. mortgage- finance company, reported a record loss and the Federal Reserve reduced its 2008 economic growth forecast. Crude oil rose above $99 a barrel, which may slow consumer spending and put pressure on the central bank to cut interest rates.

Subprime problems are far from done, said Saburo Matsumoto, senior manager of foreign-exchange sales at Sumitomo Trust & Banking Co. in Tokyo, Japan's fifth-largest lender by assets. The yen is being buoyed by it.

The yen climbed to 162.58 per euro as of 12:30 p.m. in Tokyo from 163.21 in New York yesterday. It was at 109.64 against the dollar from 109.97. The dollar traded at $1.4828 per euro, after reaching $1.4852 yesterday, the lowest since the single European currency's debut in 1999.

Japan's currency may rise to 107 per dollar this year, Matsumoto said.

Australia's dollar slipped to 97.27 against the yen from 98.13, New Zealand's dollar weakened to 83.46 from 84.15, and South Korea's won declined to 11.847 from 11.945.

Default Swaps

The risk of owning debt of financial firms from Citigroup Inc. to Bear Stearns Cos. rose on concern that credit-market losses will increase, according to credit-default swaps, which are used to speculate on the ability of companies to repay their debt. Countrywide Financial Corp., the biggest U.S. mortgage lender, denied it will file for bankruptcy linked to speculation of a cash shortage.

The yen will remain strong on the back of risk reduction, said Hiroshi Sudo, senior manager in the department of solution and sales at Central Tanshi Online Trading Co., Ltd., a Tokyo-based foreign-exchange margin trader that handles 45 billion yen ($409 million) in customers' money.

Japan's currency may rise to 105 per dollar in January, Sudo forecast.

The yen gained 5.7 percent against the Korean won this quarter, 4.8 percent versus the Australian dollar and 4.2 percent against New Zealand's, as the countries' interest-rate premiums made them attractive for so-called carry trades.

Dollar Losses

The dollar may extend losses as traders bet the Fed will cut interest rates a third time to keep the economy from slipping into recession. The U.S. consumes one quarter of the world's oil, the price of which has risen 62 percent this year to a record.

Reports today may show the Commerce Department's index of for the U.S. economic outlook fell in October and the Reuters/University of Michigan's final consumer confidence gauge stayed at a two-year low this month.

The U.S. Dollar Index traded on ICE Futures U.S. in New York, which measures the currency against six major counterparts including the euro, yen and British pound, reached a record low of 74.978 on Nov. 9, the weakest since the index started in 1973. It last stood at 75.155. The U.S. currency was also near an all- time low versus the Swiss franc.

The most likely path for the dollar into the year-end remains down, said John Horner, a currency strategist in Sydney at Deutsche Bank AG, the world's largest currency trader. The Fed will probably respond to weaker growth with a further lowering of rates.

The dollar dropped to a record low of 1.1055 versus the Swiss franc before trading at 1.1060 from 1.1058 yesterday. The U.S. currency will decline to $1.50 versus the euro by the end of the year, Horner forecast.

Source - Bloomberg