NEWS / Central Banks

Yen hits record low versus euro as 'carry trade' hurts

NEW YORK: The yen fell for a fifth straight week against the euro, reaching a record low, on expectations the European Central Bank will raise interest rates while the Bank of Japan keeps borrowing costs on hold.

Japan's currency is being hurt by the so-called carry trade, where an investor borrows low-yielding yen to finance investments in countries with higher benchmark lending rates, such as Australia, New Zealand and the euro region, said traders including Grant Wilson at Mellon Financial Corp in Pittsburgh.

"It's the carry trade'' that has led to the yen's decline, Wilson said. "Until the BoJ is aggressively hiking, this is going to remain in place.''

The yen dropped 0.5% this week to 150.29 per euro, after touching 150.73 earlier in the week, the lowest since the euro's debut in 1999. The euro rose 0.7% this week to $1.2836. The yen ended the week 0.2% stronger at 117.09 per dollar.

The yen has been "the go-to currency'' for funding the carry trade, said Paresh Upadhyaya, who helps manage $29bn in currency assets at Putnam Investments in Boston.

The yen has been the worst performer among major currencies since the start of the third quarter and is down against all 16 major currencies tracked by Bloomberg.

Since June 30, the New Zealand dollar has gained 10% against the yen, while the Australian dollar has risen 5.7%, the euro has gained 2.7% and the US dollar has climbed 2.3%.

Hedge-fund managers and other speculators increased their bets in the week ended Tuesday that the yen will drop, according to US Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by a record 88,329 contracts, the Washington-based commission said in its Commitments of Traders report. Some investors bought the euro against the yen this week as an alternative to betting on the dollar, which has moved little against the euro, said Brian Dolan, research director at Forex.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250mn funds under management.

Japan's core consumer prices climbed 0.2% in July from a year earlier, the government said last month in Tokyo. The median forecast in a survey by Bloomberg News was for a 0.5% gain.

"We have had over the last two weeks a number of data surprises which have reinforced'' a weaker yen, said Jens Nordvig, a currency strategist with Goldman, Sachs & Co in New York. "The yen is doing very poorly.''

For July, Japanese new home starts declined 7.5% after rising 4.7% the month before, a government report showed this week.

The BoJ lifted the benchmark overnight loan rate a quarter-percentage point to 0.25% in July, the first rate boost in almost six years, forecasting sustained growth and an end to deflation.

ECB President Jean-Claude Trichet on Thursday pledged "strong vigilance'' on inflation, a phrase previously used to signal an imminent rate increase.

The central bank has raised its benchmark lending rate four times since December to 3% to restrain rising prices.

It will probably lift borrowing costs twice, to 3.5% by year- end, according to the median forecast of 23 economists Bloomberg surveyed last week.

At about 3.5%, yields on two-year German government debt reached 2.87 percentage points above Japanese debt this week, the biggest gap since December 2002. Fifty-eight percent of the 43 traders, strategists and investors surveyed by Bloomberg on Friday recommended buying the euro against the yen next week. - Bloomberg