Dollar Falls to Four-Month Low Against Yen

Dollar Falls to Four-Month Low Against Yen on Growth Concerns

Aug. 6 (Bloomberg) -- The dollar fell to a four-month low against the yen and traded near a record low against the euro on speculation hedge fund losses and a slowing economy will prompt the Federal Reserve to cut borrowing costs this year.

The currency also declined against the Swiss franc after a weaker-than-forecast U.S. jobs report caused traders to increase bets on lower interest rates as soon as October. The yen climbed versus the New Zealand dollar and the British pound as a slump in Asian stocks pushed investors to repay Japanese currency loans used to purchase higher-yielding assets.

``The dollar will fall further,'' said Koichi Yoshikawa, head of currency trading at BNP Paribas in Tokyo. ``People had funded their investments with yen and Swiss francs under good credit conditions. This money stream is turning around, which means a weaker dollar and a stronger yen.''

The dollar dropped to 117.63 yen at 12:45 p.m. in Tokyo from 118.05 on Aug. 3 and reached 117.19, the weakest since March 29. It weakened to 1.1840 Swiss francs, from 1.1907. The U.S. currency also fell to $1.3816 per euro from $1.3773, close to an all-time low of $1.3852 touched July 24. It may fall to 117 yen today, Yoshikawa said.

Federal Fund futures show traders see an 84 percent chance the Fed will cut its 5.25 percent benchmark rate by October, up from 14 percent a month earlier. The Labor Department said on Aug. 3 that job growth slowed to 92,000 in July, compared with 126,000 in June and the median forecast in a Bloomberg survey of 127,000.

The pace of leveraged buyouts has slowed more than 33 percent since June, data compiled by Bloomberg show. Investors are cutting back on riskier assets such as the loans and bonds that fund LBOs after being burned by losses from U.S. subprime mortgages.

``The subprime problem and concern about the economy damage U.S. credit markets,'' Yoshikawa said.

Carry Trades

Japan's currency got a boost as a 2.7 percent decline in the S&P 500 Index spilled over to Asian stock markets, encouraging investors to pare so-called carry trades. The Morgan Stanley Capital International Asia Pacific Index of shares dropped 1.2 percent.

The yen climbed against 15 of the 16 most-active currencies. Only the Swiss franc, another popular funding currency, gained more. The yen has risen 5.2 percent against the dollar since Bear Stearns Cos. said June 22 two of its hedge funds that made bets on subprime loans collapsed.

Easy to Buy

New Zealand's dollar, a favorite of carry trades because of its 8.25 percent benchmark rate, dropped 0.6 percent to 89.21 yen. Australia's currency, where the key rate is 6.25 percent compared with Japan's 0.5 percent, slid 0.4 percent to 100.54. The pound dropped to 240.20 from 240.95 on Aug. 3.

``It's easy to buy the yen today,'' said Akio Shimizu, chief manager of foreign exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The subprime problem means traders will want to avoid risk and buy back the yen.''

Japan's currency may rise to 117 against the dollar and 161.20 per euro today, he said.

Volatility implied by yen currency options expiring in one month with a strike price near the current level rose to 10.45 percent, the highest in 14 months. Traders quote implied volatility, a measure of expected price swings, as part of pricing options.

Higher volatility may discourage carry trades as it exposes these bets to more currency risk. The yen has gained 3.3 percent against the dollar since one-month volatility started rising from 5.725 percent on June 5, the lowest since Bloomberg began compiling the data in 1995.

``We're seeing increased options demand on expectations the dollar will fall more against the yen,'' said Ryousei Ishida, senior vice president of foreign exchange options at Mizuho Corporate Bank Ltd. in Tokyo. ``Volatilities have room to rise further. There's been a lot of negative news out of the U.S.''

Federal Reserve

The dollar fell for a third day against the euro on speculation Fed policy makers will voice concern about slowing economic growth at a meeting tomorrow, where it will probably leave rates unchanged.

``With the subprime woes intensifying, the Fed might make a reference to this in their statement,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``This would fuel Fed rate-cut expectations by year-end. It's negative for the dollar,'' which may decline to $1.3852, a record low, and to 117.20 yen today.

The currency also slid for a second day against the yen as the difference in yield between benchmark two-year U.S. and Japanese bonds narrowed today to 3.42 percentage points, the least in more than two years.