Yen Falls as Asian Stock Gains Boost Confidence in Carry Trades

The yen fell to a seven-month low against the euro as gains in Asian stocks encouraged investors to add to holdings of higher-yielding assets funded in the Japanese currency.

The currency declined against the British pound and the New Zealand dollar, two favorites of so-called carry trades, as the MSCI Asia Pacific Index of regional shares rose for a second day. The dollar weakened against the euro and the pound after the Group of Eight stopped short of calling for a stronger U.S. currency in a statement after the weekend summit.

The yen fell to 167.41 per euro at 7:10 a.m. in New York, from 166.35 late on June 13. The currency slid to 108.58 per dollar, the lowest since Feb. 14, before trading at 108.28, from 108.19. The dollar weakened to $1.5460 per euro, from $1.5380, after reaching as low as $1.5450 per euro. The yen may fall to 108.80 per dollar today, Iizuka forecast.

The yen slid 0.7 percent to 212.54 per British pound and 0.5 percent to 81.48 against New Zealand's currency as the MSCI Index of regional shares rose 1.5 percent. The pound gained to $1.9631, from $1.9476.

In the carry trade, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the difference between the two. The risk is currency moves erase those profits. Japan's benchmark rate of 0.5 percent compares with 4 percent in Europe, 2 percent in the U.S., 5 percent in the U.K. and 8.25 percent in New Zealand.

The euro was supported by speculation rising prices will prompt the European Central Bank to raise interest rates more than once this year. The inflation rate in the euro area rose to 3.7 percent in May, the highest since June 1992, from 3.3 percent in April, the European Union statistics office in Luxembourg said today.

The G-8, which comprises the U.S., Japan, Russia, Germany, France, the U.K., Italy and Canada, stuck to its practice of not making a joint comment on currencies when central bankers are absent.

Yen Falls as Asian Stock Gains Boost Confidence in Carry Trades, Bloomberg
6/16/2008 6:25:44 AM