Yen Rises as Recession Concern Spurs Sales of High-Yield Assets

The yen advanced against the dollar and the euro on concern the credit crisis may cause the global economy to fall into a recession, spurring investors to sell higher-yielding assets funded in Japan.

The yen gained against 15 of the 16 most-active currencies before a government report today that economists forecast will show U.S. builders began work in September on the fewest homes in 17 years, adding to signs of a slowdown in the world's largest economy. The Japanese currency also rose as U.S. stock- index futures fell, curbing the appetite for risk and spurring carry-trade reversals.

The yen rose 0.6 percent to 100.95 against the dollar by 12:42 p.m. in London, from 101.57 late in New York yesterday, paring the week's drop to 0.3 percent. The dollar rose 0.3 percent to $1.3414 per euro and was 0.1 percent lower for the week. The euro fell 0.9 percent to 135.46 against the yen. The currency fell to a three-year low of 132.24 against the yen on Oct. 10.

Futures on the S&P 500 expiring in December fell 1.2 percent, encouraging investors to sell higher-yielding assets funded with loans from Japan. In a carry trade, investors get funds in a country with low borrowing costs and invest in ones with higher interest rates, earning the spread between the two. The benchmark interest rate is 0.5 percent in Japan, compared with 6 percent in Australia and 7.5 percent in New Zealand.

The yen rose the most against such high-yielding currencies, gaining 3 percent against the Australian dollar and 3.6 percent against the South African rand today.

The U.S. currency also dropped against the yen and the Swiss franc as traders added to bets on a Federal Reserve interest-rate cut. The dollar fell 0.2 percent against the franc to 1.1358.,
10/17/2008 5:52:34 AM