Yen Rises on Report Merrill Will Add $2.5 Billion to Writedowns
Oct. 24 (Bloomberg) -- The yen rose against all 16 of the world's most-active currencies after the New York Times reported Merrill Lynch & Co. will increase its third-quarter writedowns by $2.5 billion.
The Japanese yen strengthened the most versus the New Zealand dollar, British pound and South African rand, among the favorite targets of so-called carry trades, in which investors borrow at low interest rates to buy higher-yielding currencies. Japan's Nikkei 225 Stock Average declined, reversing gains.
``The news report on Merrill Lynch caused risk reduction, triggering stock sales and the unwinding of the yen carry trade,'' said Kenichi Yumoto, a senior dealer at Societe Generale SA in Tokyo. The U.S. investment bank said earlier this month it would report third-quarter writedowns of $5 billion, mostly to cover losses tied to a drop in the value of collateralized debt obligations amid a slump in credit markets.
The yen advanced to 114.43 per dollar at 7:17 a.m. in London from 114.78 in New York yesterday. Against the euro, it gained to 163.01 from 163.70. Japan's currency may climb to 114 versus the dollar and 162.20 a euro
today, Yumoto forecast.
A Merrill spokesman declined to comment, the New York Times reported. Standard & Poor's said today it may cut the credit ratings of 207 Australian and New Zealand residential mortgage- backed securities as turmoil in the U.S. subprime market spread.
Yuan Breaks 7.5
The yen climbed to 85.89 against the New Zealand dollar from 86.90 yesterday, and advanced to 234.25 versus the pound from 235.42. Against the rand the currency traded at 17.06 from 17.14.
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those
profits.
Japan's interest rate of 0.5 percent is the lowest among major economies and compares with a key rate of 8.25 percent in New Zealand and 5.75 percent in the U.K. South Africa's borrowing costs are 10.5 percent.
China's yuan rose beyond 7.5 to the dollar for the first time since its link to the dollar was scrapped in July 2005, driven by a widening trade surplus and inflows of foreign investment.
A report circulating within China's National Development and Reform
Commission suggested the central bank should revalue the yuan by as much as 20 percent, according to Market News International. A People's Bank of China spokesman declined to comment. Traders are betting it will break 7 per dollar by the end of next year, non-deliverable forwards contracts
show.
Australia's CPI
The yen earlier fell against the Australian dollar after a measure of the southern hemisphere nation's consumer prices rose more than economists expected, fueling speculation the central bank will raise interest rates from 6.5 percent.
``We expect a rate increase in November and that won't be the last one in the cycle,'' said Sean Callow, senior foreign exchange strategist at Westpac Banking Corp. in Singapore. ``Currency markets are going to reflect that. The Australian dollar is likely to push higher.''
Japan's currency may fall to 106 against the Australian dollar by the end of March, Callow said. The Reserve Bank of Australia next meets on Nov. 6.
The dollar may decline against the euro for a second day before a U.S. report that economists forecast will show existing home sales last month sank to the lowest since November 2001.
U.S. Housing
The U.S. currency traded at $1.4253 per euro after falling 0.6 percent yesterday. The dollar dropped to an all-time low of $1.4348 on Oct. 22.
The National Association of Realtors may say sales of previously owned U.S. homes fell 4.5 percent to an annual rate of 5.25 million in September, according to the median forecast in a Bloomberg News survey. The data is scheduled for 10 a.m. New York time.
There's a ``long way to go'' before home prices stabilize, former Federal Reserve Chairman Alan Greenspan said yesterday at a conference in Chicago.
``The U.S. housing market will get worse, with home mortgage payments going sour,'' said Tetsuhisa Hayashi, chief currency trader in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's largest publicly traded lender by assets. ``The dollar will head south'' to 114.30 yen and $1.43 a euro today, he said.
Jim Rogers, chairman of Beeland Interests Inc., said he is shifting all his assets out of the dollar and buying the yuan because the Fed has eroded the value of the U.S. currency.
``I'm in the process of -- I hope in the next few months - getting all of my assets out of U.S. dollars,'' said Rogers, who correctly predicted the commodities rally in 1999. ``I'm that pessimistic about what's happening in the U.S.''
The Fed on Sept. 18 cut the target rate for overnight lending between banks by a half-percentage point to 4.75 percent. Interest-rate futures on the Chicago Board of Trade show traders see about an 88 percent chance the Fed will lower borrowing costs to 4.5 percent on Oct. 31, up from 54 percent a week ago.
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