Rabu, 05 September 2007

Yen Gains as Watanabe Spurs Risk Aversion, U.S. Home Sales Fall

By Bo Nielsen
he yen rose versus the 16 most- actively traded currencies after Japan's chief financial regulator said he will monitor credit market losses at the nation's banks and U.S. pending home resales plummeted.

The Japanese currency also gained on speculation investors will pare purchases of higher-yielding assets made with loans in Japan and Switzerland. Global stocks fell as higher lending rates indicated banks are reluctant to lend.

``Markets are still very jittery and they are almost waiting for the next shoe to drop,'' said Camilla Sutton, co-head of currency strategy at Scotia Capital Inc. in Toronto. ``That's benefiting the yen.''

The yen rose to 115.33 against the dollar at 10:58 a.m. in New York, from 116.33 yesterday. It also climbed to 157.42 per euro from 158.26. The euro gained 0.3 percent to $1.3650.

Yoshimi Watanabe, who was appointed earlier this week, today said he'll watch banks' half-year earnings results for any losses related to U.S. subprime mortgage defaults, prompting investors to dump stocks.

European stocks fell for the first time in six days while Asian shares extended losses. The Standard & Poor's 500 Index declined 1 percent to 1,473.89. Japan's Nikkei 225 Stock Average fell 1.6 percent.

The Organization for Economic Cooperation and Development lowered its forecast for growth in the U.S. this year to 1.9 percent from an estimate of 2.1 percent in May. The Group of Seven industrialized nations, including Germany and Japan, will grow 2.2 percent, slower than an earlier estimate of 2.3 percent.

`More Ominous'

``Downside risks have become more ominous,'' Jean-Philippe Cotis, the OECD's chief economist, said today in Paris.

Japan's currency climbed 1.1 percent against the Australian dollar and 2.1 percent versus New Zealand's dollar, favorites of carry trades.

In a carry trade, the investor makes money by borrowing in a country with low interest rates, such as Japan, converting the money to a currency where interest rates are higher, such as the U.S. or euro countries, and lending the money at that higher rate. The profit comes from the spread between the borrowing and lending rates; the risk is that exchange rates may change.

Interest Rates

Japan's 0.5 percent target lending rate is the lowest among industrialized nations, helping push down the yen against 12 of the 16 major currencies over the past 12 months. The rate compares with 5.25 percent in the U.S., 4 percent in the euro region and 8.25 percent in New Zealand.

The dollar extended its loss versus the yen after a private report showed the number of Americans signing contracts to buy previously owned homes fell in July by the most since records began in 2001, extending a U.S. housing slump that is weighing on credit markets and the economy.

The index of signed purchase agreements, or pending home resales, fell 12.2 percent to 89.9, the lowest since September 2001, after increasing 5 percent in June, the National Association of Realtors said today in Washington. The median estimate of economists polled by Bloomberg News projected a 2.2 percent drop.

``The numbers show that it's not just a financial crisis anymore, but that it's spilling into the real economy in a very material manner,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``We're in for a big slide in the housing market in the months to come. It should be very negative on risk appetite and benefit the yen.''

Canada's Dollar

The Canadian dollar fell 0.2 percent to 95.06 U.S. cents after the Bank of Canada kept its benchmark lending rate unchanged at 4.5 percent and suggested credit market problems may slow domestic demand and exports.

The Reserve Bank of Australia kept its key rate at 6.5 percent today after boosting borrowing costs last month to curb inflation.

``Both central banks were looking to hike rates at this round, but opted to wait and see what will happen with the credit markets,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago.

The Bank of England and European Central Bank will leave rates unchanged tomorrow, according to Bloomberg surveys. The U.K.'s benchmark rate is 5.75 percent.

The U.K. central bank acted today to free up England's money markets by allowing an increase in commercial banks' reserves and boosting the amount of money offered at its regular fine-tuning operations.

The Federal Reserve will release a survey at 2 p.m. in Washington, known as the beige book, that may show mortgage defaults and rising financing costs are curbing demand in the world's biggest economy.

`Dollar Remains Weak'

``The dollar still remains weak,'' said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities. ``The beige book may show a downside risk with the U.S. economy. The Fed may indicate the correction of housing markets will adversely affect consumer spending.''

Fed Bank of Richmond President Jeffrey Lacker said in an interview with Reuters yesterday he would support a rate cut if financial turmoil led to slower economic growth, while cautioning that the outcome is ``unclear.''

The Fed cut its rate on loans to banks on Aug. 17, saying risks to growth had increased.

Interest-rate futures show a 70 percent chance the Fed will lower its 5.25 percent target rate for overnight loans between banks to 4.75 percent at its Sept. 18 meeting, up from 44 percent a week ago. The odds of a reduction to 5 percent are 30 percent.

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