Yen Gains Versus 16 Major Currencies as Investors Reduce Risks

The yen rose against all 16 most- actively traded currencies this week as spreading losses in U.S. financial companies and real estate prompted investors to retreat from higher-yielding assets funded by loans in Japan.

The yen increased to the highest level since June 2005 against the dollar yesterday. The U.S. dollar fell to all-time lows against the euro and Swiss franc on expectations the Federal Reserve may cut borrowing costs next month. A report may show next week that sales of previously owned homes in the U.S. dropped in October to the fewest since at least 1999, according to a Bloomberg News survey.

``The real game in town is the yen,'' said David Woo, global head of foreign-exchange strategy at Barclays Capital in London. ``The yen is really flying. The U.S. economy is facing a lot of uncertainties.''

The yen rose 2.5 percent against the dollar this week, after touching a two-year high of 107.55 yen. The yen also gained 1.4 percent against the euro to 160.55 per euro. Japan's currency strengthened to 221.31 yen per pound yesterday, the most since Aug. 17.

The Organization for Economic Cooperation and Development said Nov. 22 that the estimated losses from U.S. subprime foreclosures may reach as much as $300 billion, on top of the more than $60 billion the world's biggest banks, brokers and insurers have announced they will write down. Freddie Mac, the second-largest U.S. mortgage-finance company, may report wider losses than it forecast as the slump in credit markets worsens, Moody's Investors Service said.

Swiss Franc

The Swiss franc, also used as a funding currency for so- called carry trades, gained against 14 of the 16 major currencies. It rose to a record 1.0890 versus the dollar yesterday, and strengthened to a three-month high of 1.63 against the euro. In carry trades, investors sell currencies in countries with low borrowing costs and buy higher-yielding assets elsewhere, profiting from the difference.

``The main trend is for the yen to appreciate further because of risk aversion,'' said Hidetoshi Yanagihara, senior currency trader at Mizuho Corporate Bank in New York. ``The market is thinking the turmoil in the financial sector will continue.''

The U.S. currency yesterday touched $1.4967 per euro, the weakest since the European currency started trading in January 1999. The dollar also dropped below 7.4 against China's yuan for the first time since a fixed exchange rate was scrapped in 2005.

Dollar Index

The U.S. Dollar Index traded on the ICE Futures in New York touched 74.484 yesterday, the lowest since the gauge started trading in 1973. The index tracks the value of the dollar against six major currencies, including euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc.

Futures contracts traded on the Chicago Board of Trade showed a 94 percent chance of the Fed cutting its benchmark interest rate a quarter percentage point to 4.25 percent at the Dec. 11 policy meeting. The European Central Bank's benchmark borrowing costs are at 4 percent.

The U.S. currency has lost 12 percent against the euro this year as the housing recession and lower interest rates dimmed the allure of dollar-denominated assets. The Fed has cut the key rate 0.75 percentage point to 4.5 percent since Sept. 18.

``There's speculation in the market as to whether the dollar is in terminal decline,'' said Michael Klawitter, a currency analyst at Dresdner Kleinwort in Frankfurt. ``It's looking increasingly possible that the dollar will lose its status as the major transaction and reserve currency.''

Home Sales

Existing home sales probably declined to an annual rate of 5 million in October, from 5.04 million in the previous month, according to the median forecast of 56 economists surveyed by Bloomberg News. That would be the lowest since the National Association of Realtors compiled the data in 1999. The report is scheduled for release on Nov. 28.

``If the housing data turns out to be horrible again, the market will feel assured the Fed must cut rates in December,'' said Boris Schlossberg, senior currency strategist at DailyFX.com in New York. ``They will push it through $1.5 against the euro.''

China's yuan strengthened 0.25 percent this week against the dollar. The currency's appreciation ``should accelerate,'' ECB President Jean-Claude Trichet said on Nov. 22. Trichet will lead a delegation to Beijing next week for two days of talks with Chinese authorities on trade and allowing faster appreciation of the yuan.

While the yuan has risen about 5 percent against the dollar this year, it weakened by almost 7 percent versus the euro, raising the cost of European goods for Chinese consumers.
(Source bloomberg.com)