Australia Dollar Reaches 6-Month High Vs Yen

The Australian dollar rose to a six- month high against the yen as a reduction in volatility encouraged investors to buy higher-yielding assets funded in the Japanese currency.

Australia's dollar gained for a third day as a measure of currency volatility declined to its lowest in seven months, encouraging so-called carry trades. The currency extended the past week's gain to 1.6 percent as the difference in yield between two-year Australian and Japanese government bonds widened to the most since March 3.

The Australian dollar climbed to 100.89 yen, the strongest since Nov. 15, before trading at 100.88 yen as of 10:24 a.m. in Sydney from 100.24 yen late in Asia yesterday. The currency rose to 96.32 U.S. cents from 95.80 cents. It reached 96.54 cents on May 22, the highest since February 1983. Australia's currency may advance to 101.10 yen and 96.54 cents today, Soma said.

The local dollar was the fourth-best performer of the 16- most active currencies against the yen as implied volatility on one-month Australian dollar options versus the yen declined to 14.225 percent, the least since Oct. 18. Lower volatility tends to encourage carry trades by making profit easier to predict.

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. The risk is currency moves erase gains. Australia's benchmark rate of 7.25 percent compares with 2 percent in the U.S. and 0.5 percent in Japan.

The odds of the Reserve Bank of Australia raising interest rates at its June 3 meeting were unchanged from yesterday at 2 percent, according to a Credit Suisse Group index based on interest-rate swaps.

Australia Dollar Reaches 6-Month High Vs Yen, Bloomberg
5/28/2008 7:09:19 PM