Yen Falls as Asian Stocks Gain

Yen Falls as Asian Stocks Gain, Australia Raises Interest Rate

Aug. 8 (Bloomberg) -- The yen fell against the euro as Asian stocks rose and the Federal Reserve said the U.S. economy can withstand mortgage defaults, encouraging investors to buy higher-yielding assets with funds borrowed in Japan.

The currency fell the most against the Australian dollar, a favorite of so-called carry trades, after that nation's central bank raised its benchmark rate to 6.50 percent today. The &cls;Standard and Poor's 500 Index&cle; posted its best two-day gain since 2003 after the Fed said a six-year economic expansion won't be undone by a credit-market slump.

``With stock prices rising, the yen should be weaker,'' said Satoshi Okagawa, head of the foreign-exchange forward trading group at Sumitomo Mitsui Banking Corp. in Tokyo. ``All in the markets are caring about stocks, which represent risk appetite.''

The Japanese yen declined to 163.49 per euro at 1:38 p.m. in Tokyo from 163.25 late in New York yesterday. It also fell to 118.93 against the dollar from 118.83.

The yen dropped against 12 of the 16 most-active currencies as the Morgan Stanley Capital International Asia-Pacific Index of shares rose 0.6 percent. The S&P 500 climbed yesterday as investors took the Fed's statement as a sign turmoil in the credit markets won't limit global growth.

The Australian dollar has gained 0.8 percent versus the yen this month. It rose to 101.83 yen today from 101.57 in New York yesterday. The Reserve Bank of Australia increased its benchmark rate from 6.25 percent, widening the advantage in yield for two- year Australian debt over Japanese government bonds to 5.40 percentage points from 5.37 points on Aug. 6.

New Zealand's dollar, another favorite of the carry trade with a key rate of 8.25 percent, was at 90.46 yen.

`Surprisingly Weak'

Japan's currency also extended this month's losses to 0.8 percent against the euro after machinery orders, a key indicator of corporate spending plans, fell a seasonally adjusted 10.4 percent in June from the previous month. The median of 40 estimates in a Bloomberg News survey was for a 1.1 percent drop.

``The data were surprisingly weak,'' said Masaki Fukui, a senior economist and currency analyst at Mizuho Corporate Bank Ltd. in Tokyo. ``Today's data cannot support the Bank of Japan to raise rates this month. It's yen negative.''

The yen may move between 115 and 120 per dollar in one month, Fukui said.

The Bank of Japan will hold a two-day policy meeting starting on Aug. 22. The central bank last increased borrowing costs by 0.25 percentage point in February to 0.5 percent, the lowest among major economies. The benchmark rate is 4 percent in the euro region.

The yield premium investors earn on 10-year U.S. Treasury notes over similar-maturity Japanese bonds widened to 3.05 percentage points from 3.03 points yesterday and 2.90 points at the end of last week.

Subprime Mortgages

Fed policy makers repeated that inflation is still a risk after keeping rates at 5.25 percent. The ``economy seems likely to continue to expand at a moderate pace,'' the rate-setting Federal Open Market Committee said.

Gains in the dollar may be limited by speculation losses on U.S. subprime mortgages will prompt the Fed to lower interest rates this year.

The U.S. currency has fallen 3.6 percent against the yen in the past month on concern housing-market weakness will slow economic growth. Fed Funds futures also show traders increased bets on at least one rate cut by December to 49.5 percent odds from 6 percent a month ago.

``The U.S. subprime problems won't be solved any time soon, as housing prices are still falling,'' said Yuji Kameoka, a senior economist and currency analyst at Daiwa Institute of Research in Tokyo. ``This is a continuing correction of the housing market bubble and will keep adversely affecting U.S. consumption,'' pushing down the dollar to 115 yen by year-end.

German Exports

The euro may strengthen on speculation a German report today will show exports rebounded in June, adding to evidence Europe's largest economy is resilient to higher borrowing costs.

Europe's single currency may extend this year's 4 percent gain versus the yen on prospects the European Central Bank will raise interest rates at a faster pace than the Bank of Japan. The yield spread between two-year German and Japanese bonds was 3.29 percentage points today, above the average of 3.13 points in the past year.

``Growth in the euro area is robust,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``The ECB is likely to hike in September and perhaps once more this year. It's supportive of the euro,'' which may rise to $1.3770 and 163.75 yen today, he said.