Yen Unbeatable as Credit Seizure Kills Carry Trades


The same credit market collapse that drove Lehman Brothers Holdings Inc. into bankruptcy and sent bank borrowing costs in Europe to record highs is making the yen unbeatable.

Japan's currency was the best-performer in September and the only currency to appreciate against the dollar.

After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $584 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade-weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007, when the seizure in capital markets began.

The currency rose 4 percent to 101.21 per dollar as of 10:53 a.m. in New York from 105.32 late on Oct. 3. Japan's currency also climbed 9 percent to 63.92 per New Zealand dollar and gained 11 percent to 72.45 against the Australian dollar. It advanced 9 percent to 46.88 versus the Brazilian real from 51.5240.

The currency lost 60 percent against the Australian and New Zealand dollars in the seven years ended June 30, and depreciated 24 percent versus the real and 20 percent to the British pound. The main cause was the so-called carry trade, where investors took out loans in Japan to take advantage of the lowest benchmark interest rates among the Group of 10 industrialized nations. They then sold the yen and invested the proceeds in high-yielding assets outside the country.

The yen rose to 135.58 per euro today, the highest level since its 1999 introduction, and 176.06 versus the pound, the strongest since November 2001.

The euro had its biggest one-day drop against the yen since its debut in 1999 as the deepening credit crisis prompted European governments to pledge bailouts for troubled banks while stopping short of coordinated action.

The 15-nation currency declined to a 14-month low against the dollar and the weakest in 2 1/2 years versus the yen after leaders meeting at the weekend avoided announcing any plan that would mirror the U.S.'s $700 billion bailout.

The euro fell to 136.7 yen, the weakest since March 2006 as of 11:20 a.m. in New York, from 145.11 on Oct. 3. The euro declined to $1.350, from $1.3772 the lowest since Aug. 23, 2007. Against the pound, the euro fell to 77.7 pence, the lowest since March 14.

The pound fell against the dollar amid speculation the Bank of England will cut interest rates this week to bolster an economy that may be in a recession. The U.K. currency declined to $1.37 at 11:20 a.m. in New York, from $1.7714 at the end of last week, when it dropped 4 percent, the most since October 1992.

Canada's currency
weakened to the lowest since May 2007 as crude oil fell below $90 a barrel for the first time since February. The Canadian dollar dropped as much as 0.9 percent to C$1.0924 per U.S. dollar, from C$1.0827 on Oct. 3, the lowest since May 18, 2007, when it touched C$1.1001. It last traded at C$1.105 at 11:25 in New York.

Brazil's real fell to the lowest level in almost two years as the global credit crunch spread, further reducing investment flows to higher-yielding, emerging- market assets. The real tumbled 6.5 percent to 2.59 per dollar at 11:30 a.m. in New York, from 2.0440 on Oct. 3

The Australian dollar
dropped below 75 U.S. cents for the first time since October 2006 and New Zealand's currency also declined as a deepening global credit crisis damped demand for higher-yielding assets. The Australian dollar fell 7.98 percent to 71.8 U.S. cents as of 11:25 a.m. in new York from late last week in New York.  New Zealand's dollar weakened 2 percent to 62.90 U.S. cents from 66.18 cents in New York last week.

India's rupee
weakened to the lowest level since February 2003 as losses in local stocks prompted global funds to reduce ho...


TradingEconomics.com, Bloomberg.com
10/6/2008 8:35:13 AM