The yen rose before U.S. reports today that economists forecast will show the recession is deepening in the world’s largest economy, prompting investors to cut holdings of higher-yielding assets financed in Japan.
The currency snapped two days of losses against the dollar and the euro on speculation a bailout of Citigroup Inc. and U.S. President-elect Barack Obama’s stimulus plans won’t prevent a protracted slump, reducing demand for so-called carry trades. The economy shrank more in the third quarter than earlier estimated, according to a Bloomberg News survey before a report due today.
“There is much skepticism about how long the Citigroup- rescue-inspired confidence will last,” said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. “Worries about a deep and prolonged global recession will likely continue to support the yen over coming months.”
The yen advanced to 96.67 against the dollar as of 10:30 a.m. in Tokyo from 97.34 late in New York yesterday, when it dropped 1.4 percent. It strengthened to 124.50 per euro from 126.08, after dropping 4.3 percent yesterday. The euro fell to $1.2877 from $1.2953. The British pound declined to $1.5134 from $1.5183.
Against the yen, Australia’s dollar lost 1.8 percent to 62.51 from 63.66 late in New York yesterday. New Zealand’s dollar fell 1.4 percent to 52.66 yen and Norway’s krone dropped 1.2 percent to 13.9006 yen.
Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July to September, more than the government’s earlier estimate of 0.3 percent, Bloomberg’s survey shows. The Commerce Department report will be released at 8:30 a.m. in Washington.
Consumer Confidence
The Conference Board’s consumer confidence index remained at 38 in November, matching the October reading that was the lowest since monthly records began in 1967, a separate Bloomberg survey shows. The data are due at 10 a.m. in New York.
Japan’s benchmark interest rate of 0.3 percent compares with 5.25 percent in Australia, 6.5 percent in New Zealand and 3.25 percent in Europe.
In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. The risk is that currency market moves erase those profits.
Citigroup
Citigroup received a U.S. government rescue package that shields the bank from losses on $306 billion of toxic assets and injects $20 billion of capital. President-elect Obama warned in Chicago that the U.S. faces the loss of “millions of jobs” next year and vowed to push for a stimulus package without specifying the cost. Financial institutions around the world are facing $968 billion in losses on securities tied to home mortgages.
The euro fell against the dollar on speculation the European Central Bank will lower interest rates by more than the Federal Reserve as European economies slow.
Inflation in the 15 countries that share the euro slowed to 2.4 percent in November from 3.2 percent in the previous month, according a Bloomberg survey before the data’s release on Nov. 28. Slowing gains in consumer prices may allow the ECB more room to lower rates. Business confidence in Germany, Europe’s largest economy, slumped to a 16-year low this month, data showed yesterday.
ECB Rates
“The Fed is close to the end of its rate cutting cycle while the ECB at 3.25 percent is only in the middle of its easing cycle,” a team of analysts at UBS AG, led by Mansoor Mohi-Uddin in Zurich, said yesterday in a research report. “Further ECB rate cuts are likely to keep the euro constrained against the dollar and yen.”
Futures on the Chicago Board of Trade show a 100 percent chance the Fed will reduce its 1 percent target rate for overnight bank loans by at least 0.25 percentage points at its next meeting on Dec. 16, up from 42 percent odds for a rate cut one month ago.
Traders increased bets the ECB will reduce its 3.25 percent rate in the second quarter. The implied yield on Euribor futures contracts expiring in June fell to 2.52 percent from 2.91 percent at the end of last month. The ECB benchmark is 0.39 percentage point higher than the Euribor contract yield, compared with a 12- month average of 0.19 percentage point below the futures rate.
