Yen Declines as Gains in U.S. Stocks Encourage Carry Trades

The yen declined against 14 of the 16 most-active currencies after U.S. stocks advanced, encouraging investors to increase holdings of higher-yielding assets bought with money borrowed in Japan.

Japan's currency weakened the most against the South African rand and the Swedish krona after Asian stocks futures climbed on speculation the U.S. Federal Reserve will lower interest rates by a half percentage point this week.

The yen fell for the second day to 158.11 per euro at 8:17 a.m. in Tokyo from 158.02 late in New York yesterday. Japan's currency was at 106.99 per dollar compared with 106.90 late yesterday. The euro was at $1.4781.

The yuan rose to 7.1970 per dollar at the 5:30 p.m. close in Shanghai yesterday, advancing through 7.2 per dollar for the first time since the end of a dollar peg in July 2005, according to data compiled by Bloomberg.

One-month implied volatility for the yen fell to 13.65 percent today, from 13.88 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Lower volatility may encourage so- called carry trades.

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 them.

Yen Declines as Gains in U.S. Stocks Encourage Carry Trades, Bloomberg
1/28/2008 4:29:31 PM