Dollar loses early gains against euro



Yen Trades Near Six-Year High Versus Euro on Economic Turmoil

By Ye Xie and Daniel Kruger

Oct. 28 (Bloomberg) -- The yen traded near the strongest level versus the euro since May 2002 and a 13-year high against the dollar as global economic turmoil encouraged investors to sell higher-yielding assets and pay back loans in Japan.

French Finance Minister Christine Lagarde said in an interview with Bloomberg News yesterday that the Group of Seven doesn't plan to intervene to weaken the yen after the G-7 said in an unscheduled statement that excessive movements in the currency may threaten financial stability. The dollar rose to the strongest versus the euro since April 2006 as investors sought a shelter in the greenback.

“What we are seeing is a massive unwinding of this carry trade, and that's why the yen is benefiting,” said Mohamed El- Erian, co-chief executive officer of Pacific Investment Management Co. in Newport Beach, California, in an interview on Bloomberg Television.

The yen traded at 115.92 JPY/EUR at 6 a.m. in Tokyo, after rising 2.6 percent yesterday and touching 115.92 JPY/EUR, the strongest level in more than six years. The yen was at 92.79 JPY/USD, following a 1.6 percent gain yesterday. It touched 90.93 JPY/USD on Oct. 24, the strongest since August 1995. The euro traded at 1.2492 USD/EUR, after dropping 1.1 percent yesterday and touching 1.2334 USD/EUR, the lowest level in 2 1/2 years.

In the past month, Japan's currency has increased 14 percent against the dollar, 33 percent versus the euro, 35 percent versus the pound and 43 percent against the Canadian dollar on speculation investors will unwind carry trades, in which they get loans in countries with low borrowing costs and seek higher returns elsewhere.

Stronger Yen

The yen gained 3.6 percent to 144.74 JPY/GBP yesterday and 2.8 percent to 71.88 JPY/CAD. The Bank of Japan's 0.5 percent target lending rate compares with 3.75 percent in Europe, 4.5 percent in the U.K. and 2.25 percent in Canada.

The appreciation of the yen accelerated as investors bought the Japanese currency “as insurance to protect” against the potential declines in stocks, said Sebastian Galy, a currency strategist at BNP Paribas Securities SA in New York.

The G-7 made its statement after a request from Japan, said Finance Minister Shoichi Nakagawa in Tokyo, adding that his government was ready to act if needed.

‘Adverse Implications’

“We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability,” the G-7 said in its statement, read by Japan's Nakagawa. The group comprises Canada, France, Germany, Italy, Japan, the U.K. and the U.S. Japan last sold its own currency in 2004.

Asked by Bloomberg News in an interview in Montpellier, France, yesterday if the G-7 will intervene to sell Japan's currency, Lagarde said the group had no plans to do so.

“Her statement essentially was to send a clear signal to the markets, `Don't read too much into the G-7 statement,”' said Paresh Upadhyaya, who helps manage USD 50 billion in currency assets as a senior vice president at Putnam Investments in Boston. “That statement did not necessarily mean that everybody in the G-7 is necessarily concerned with yen appreciation. The concerns about an immediate intervention in dollar-yen are unfounded.”

Upadhyaya has been betting that the yen will appreciate against other currencies.

Weaker Sterling

The pound fell 2 percent to 1.5586 USD/GBP yesterday as London-based Hometrack Ltd. said the average cost of a residential property in England and Wales slipped 7.3 percent from a year earlier. Sterling decreased 1.3 percent to .8030 GBP/EUR.

The euro stayed lower against the dollar and the yen after a survey by the Ifo institute showed business confidence in Germany, the largest of the 15 economies sharing the currency, declined to the lowest level in more than five years in October. European Central Bank President Jean-Claude Trichet said yesterday policy makers may cut interest rates on Nov. 6.

The Federal Reserve will lower its 1.5 percent target lending rate by a half-percentage point at the conclusion of its two-day policy meeting on Oct. 29, according to the median forecast of 64 economists surveyed by Bloomberg News.

“We still like the dollar,” said Benedikt Germanier, a currency strategist at UBS AG in Stamford, Connecticut, in an interview on Bloomberg Television. “We see a global convergence of interest rates. We see a flight to safety.”

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