By David McIntyre and Stanley White (found on www.bloomsberg.com)
June 5 (Bloomberg) --
The euro rose to a record versus the yen on prospects the European Central Bank will raise interest rates tomorrow, widening the yield differential with Japan.
The yen is the world's worst performer this quarter as the lowest borrowing cost among major economies spurs investors to borrow in Japan to buy higher-yielding assets. The spread between European and Japanese three-month benchmark lending rates reached a five-year high.
``Japanese mutual funds are selling yen and buying currencies like the euro,'' said Takehiko Jimbo, currency manager in Tokyo at Mitsubishi UFJ Trust & Banking Co., a unit of Japan's biggest lender by assets. ``The ECB is set to raise rates tomorrow, and I think President Jean-Claude Trichet will sound hawkish about future policy.''
The euro traded to an all-time high of 164.49 yen and was at 164.43 as of 6 a.m. in London, from 164.27 in New York yesterday. It was at $1.3498 against the dollar from $1.3489. The dollar bought 121.82 yen from 121.77. The single European currency may rise to 164.80 yen and $1.3550 today, Jimbo said.
Japanese rates of 0.5 percent compare with Europe's 3.75 percent and 5.25 percent in the U.S. That gap has caused the yen to decline 4.2 percent against the euro and 3.2 percent versus the dollar this quarter.
The ECB will lift its benchmark rate tomorrow to 4 percent, according to all 52 economists surveyed by Bloomberg News. The advantage of European three-month London interbank offered rates over Japan's is 3.43 percentage points, the most since May 2002.
China Syndrome
Japan's currency may gain for a second day against the dollar as investors may unwind so-called carry trades, borrowing yen for higher returns elsewhere. China's benchmark stock index has tumbled 21 percent from a May 29 peak after the government tripled the tax on share trades.
The CSI 300 Index extended declines today after the government's main business newspaper signaled officials won't try to stop a slide that erased more than $500 billion of market value since May 30.
``The Chinese stock market is falling again,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``This could lead to carry trade unwinding and buying of the yen,'' which may advance to 121.52 against the dollar and 164 per euro today, he said.
15-Year Lows
Japan's currency hovered near the lowest in more than 15 years against the Australian and New Zealand dollars, two beneficiaries of the carry trade.
Against the Australian dollar, the yen fell to 101.82, the lowest since April 1992. It dropped to a 17-year low of 91.28 against the New Zealand dollar. Interest rates in both countries are at least 5.75 percentage points higher than those in Japan. The Kiwi, as New Zealand's currency is known, rose to 74.94 U.S. cents, the highest since it was floated in March 1985.
The dollar may be bolstered by speculation Federal Reserve Chairman Ben S. Bernanke today will signal the U.S. economy is resilient and inflation is not yet tamed, adding to expectations the Fed doesn't need to lower interest rates.
``He may say economic growth is picking up and express concern over inflation,'' said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Co. in Tokyo. ``This would be supportive of the dollar,'' which may rise to 122 yen and $1.3450 per euro today, he said.
The U.S. currency may extend a 1.3 percent advance against the yen in the past month as Bernanke will discuss housing and the economy via satellite at an International Monetary Conference at 2:15 p.m. in Cape Town, South Africa. Bank of Japan Governor Toshihiko Fukui and ECB President Trichet will also speak at the conference.
Traders reduced the odds of a Fed rate cut by the end of 2007 to 24 percent from 100 percent at the start of May.
The dollar also may benefit from a drop in yen options volatility to the lowest in almost 11 years. The decline may encourage investors to borrow yen to buy securities denominated in higher-yielding currencies such as the dollar.
Volatility implied by one-month dollar-yen options dropped to 5.85 percent, the lowest since Bloomberg started tracking the data in 1995. Traders quote implied volatility, a measure of expected exchange-rate swings, as part of setting options prices.
To contact the reporter on this story: David McIntyre in Sydney at dmcintyre2@bloomberg.net ; Stanley White in Tokyo at swhite28@bloomberg.net
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Tuesday, June 5, 2007
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