Yen Rises Against Euro as Carry Trades Pared on Stock Declines

By Kosuke Goto and Stanley White
Aug. 1 (Bloomberg) -- The yen rose to a one-week high against the euro as a decline in Asian stocks prompted traders to pare holdings of higher-yielding assets funded in the Japanese currency.

The currency advanced the most versus the Australian and New Zealand dollars, favorites of so-called carry trades, after data showing the U.S. economy grew less than expected in the second quarter heightened concern global growth will slow. The euro fell against the dollar on speculation a government report today will show slumping German retail sales, undermining the case for the European Central Bank to raise interest rates.

``Traders are buying the yen now in anticipation that stock-market losses will widen,'' said Tetsu Aikawa, deputy general manager of the capital markets division at Shinsei Bank Ltd. in Tokyo. ``The growth data paint a poor picture of the U.S. economy.''

The yen rose to 167.84 per euro at 11:11 a.m. in Tokyo from 168.39 late yesterday in New York. It earlier touched 167.63, the highest since July 25. The dollar weakened to 107.86 yen from 107.91. The euro slid to $1.5558 from $1.5603. The yen may rise to 167.50 against the euro today, Aikawa forecast.

The MSCI Asia-Pacific Index of regional shares declined 1.2 percent as former Federal Reserve Chairman Alan Greenspan said U.S. home prices are ``nowhere near the bottom.'' A Labor Department report today may show companies cut employees for a seventh month in July.

Carry Trades Reduced

In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. The Bank of Japan's target lending rate is 0.5 percent, the lowest among major economies. Benchmark rates are 4.25 percent in Europe, 7.25 percent in Australia and 8 percent in New Zealand.

Japan's currency rose to a one-month high of 100.88 per Australian dollar from 101.69 yesterday in New York. It climbed to a four-month high of 78.42 per New Zealand dollar from 79.25 yesterday. Traders speculated the Reserve Bank of Australia will lower its benchmark rate by 68 basis points, or 0.68 percentage point, over the next 12 months, according to a Credit Suisse Group index based on interest-rate swaps. That's up from 32 basis points at the end of last week.

U.S. gross domestic product increased at an annual rate of 1.9 percent in the second quarter, the Commerce Department reported yesterday. Economists predicted 2.3 percent growth, a Bloomberg survey showed. The report also showed that a recession may have begun in the final three months of 2007, as GDP was revised to indicate a contraction in that period.

Jobless Claims

U.S. non-farm payrolls dropped by 75,000 last month, following a decline of 62,000 in June, according to a Bloomberg News survey of economists. The Labor Department's report is scheduled to be released at 8:30 a.m. in Washington.

Futures contracts on the Chicago Board of Trade showed a 32 percent chance the Fed will raise its 2 percent target rate for overnight loans between banks by at least a quarter-percentage point by Sept. 16, down from 38 percent odds on July 30.

``The U.S. labor markets will no doubt remain weak,'' said Masaki Fukui, a senior economist and currency analyst in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest publicly traded lender by assets. ``This will weigh on the dollar.''

The dollar may fall to 105 yen by the end of September, he forecast.

Oil Link

The U.S. currency also gained against the euro after crude oil yesterday fell more than $2 a barrel. The euro-dollar exchange rate and oil have had a correlation of 0.9 in the past year, according to Bloomberg calculations based on their value changes. A reading of 1 would mean they moved in lockstep.

``Oil looks quite heavy, and commodities seem to be in a longer-term downward trend,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``It lent some support to the dollar.''

The euro weakened for a fifth day against the yen on speculation consumer demand is slowing in Germany, Europe's largest economy. Retail sales, adjusted for inflation and seasonal swings, fell 0.5 percent from May, when they rose 0.5 percent, the Federal Statistics Office in Wiesbaden may say, according to a Bloomberg News survey of economists.

``With expectations of a rate hike by the ECB dwindling, the euro is falling,'' said Koji Fukaya, senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world's largest currency trader. ``There have even emerged expectations of an ECB rate cut.''

Europe's single currency may fall to $1.45 against the dollar by year-end, Fukaya said.