Yen Rises on Speculation Global Rate Cuts May Curb Carry Trades

Nov. 4 (Bloomberg) — The yen rose against higher-yielding currencies on speculation a series of global interest-rate cuts will make it less attractive to purchase overseas assets using funds from Japan.

The yen gained against the Australian dollar as economists forecast the Reserve Bank of Australia will lower borrowing costs by half a percentage point to 5.5 percent today. It also advanced versus the euro and the British pound, before expected rate reductions by the European Central Bank and the Bank of England this week.

“The RBA could be the catalyst for the yen to strengthen,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. Ltd., a unit of Japan’s largest brokerage. “We can’t rule out a larger-than- expected rate cut, which would damage sentiment for carry trades.”

The yen rose to 66.44 per Australian dollar at 11:32 a.m. in Tokyo from 67.04 late yesterday in New York. Japan’s currency strengthened to 125.11 against the euro from 125.33, and 156.68 versus the pound from 156.84. It was quoted at 99.05 per dollar from 99.12.

The euro bought $1.2633 from $1.2643. The yen may advance to 117 per euro and 94 against the dollar this week, Amikura said.

The RBA, which lowered its benchmark interest rate at each of the past two monthly policy meetings, will announce its decision at 2:30 p.m. today in Sydney. The Japanese currency is popular in carry trades, where purchases of higher-yielding assets are funded in nations with lower interest rates. Japan’s key rate is 0.3 percent, the lowest among major economies.

U.S. Election

Foreign-exchange markets may be “distracted” by the U.S. presidential elections starting later today, according to UBS AG, the world’s second-largest currency trader.

Democratic nominee Barack Obama held a 54 percent to 43 percent lead among likely voters over Republican candidate John McCain in the presidential campaign, according to a Washington Post-ABC News tracking poll.

“With the result largely priced in, we are not expecting a significant impact on the currency markets,” wrote Geoff Kendrick, a senior currency strategist in London at UBS, in a research note yesterday.

The euro fell for a fourth day against the dollar on speculation the European Central Bank will lower rates to cushion the impact of a slowing economy. The ECB will trim its benchmark rate by half a percentage point to 3.25 percent when it announces a policy decision on Nov. 6, according to a Bloomberg survey.

ECB Rates

The Euro-zone economy probably entered a recession this year and will stagnate in 2009, the European Commission said yesterday. European manufacturing contracted at a record pace in October and faster than initially estimated, data showed yesterday.

“The trend is for the euro to weaken,” said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan’s second-largest publicly traded lender. “Recession has reared its head in Europe, and that’s fairly negative for sentiment.”

The euro may decline to $1.2450 today, he said.

The Bank of England will lower its key interest rate to 4 percent from 4.5 percent at a meeting ending Nov. 6, according to economists surveyed by Bloomberg. The Federal Reserve reduced its target lending rate by a half-percentage point to 1 percent on Oct. 29. Central banks in China, Taiwan, Hong Kong, India and the Middle East also cut borrowing costs in the past week as policy makers race to avert a global recession.

Global Slump

The U.S. economy, the world’s biggest, shrank at a 0.3 percent annual pace in the third quarter and an industry report yesterday showed manufacturing contracted in October at the fastest rate in 26 years. In Japan, the world’s second-largest economy, the Nikkei 225 Stock Average last month reached its lowest level since 1982.

The ICE’s Dollar Index, which tracks the greenback versus the currencies of six major U.S. trading partners, was little changed at 86.34. It touched 87.88 on Oct. 28, the highest level since April 2006.

“The dollar has been forced up,” said Jim Rogers, chairman of Singapore-based Rogers Holdings, who correctly predicted the start of the commodities rally in 1999, in an interview on Bloomberg Television yesterday. “There’s a period of forced liquidation. My plan is to get out of the dollar sometime in the next few months.”

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