Will the Yen strengthen?

Yen Gains as Omi Emphasizes Risks of Betting Against Currency

By Kosuke Goto and Ron Harui

June 26 (Bloomberg) -- The yen strengthened after Japan's Finance Minister Koji Omi emphasized the risk to investors of one-way bets against the currency.

Japan's yen rose against all 16 most-active currencies after Omi said he's carefully watching the foreign-exchange market and disorderly moves are undesirable. The yen is the world's worst performer this quarter as the lowest interest rate among major economies prompted investors to borrow it to buy higher-yielding assets in so-called carry trades.

``Omi's comments elevated the sense of vigilance against yen carry trades,'' said Kenichiro Fujita, manager of Aozora Bank Ltd.'s derivatives marketing group in Tokyo. ``The yen looks strong'' and will rise to 122.80 per dollar today, he said.

The yen climbed to 123.42 per dollar at 9:40 a.m. in Tokyo from 123.67 late in New York yesterday. Japan's currency traded at 166.08 per euro from 166.49.

The yield spread between benchmark 10-year U.S. and Japanese bonds widened to 3.365 percentage points on June 12, the most in almost four years.

Interest-rate differentials have encouraged investors to borrow cheaply in Japan, causing ``continuing build-up of carry trades,'' the Bank for International Settlements said in an annual report published June 24. The Basel-based bank warned investors about their ``too firm conviction'' on carry trades.

Falling Stocks

Japan's currency also rose on speculation investors will exit carry trades after U.S. stocks declined.

The yen gained for a second day against the dollar as a slide in the Standard & Poor's 500 Index yesterday on concern losses tied to subprime mortgages will deepen reduced appetite for riskier investments funded with loans in yen.

Bear Stearns Cos. led the drop in stocks after a Merrill Lynch & Co. analyst said the second-biggest U.S. underwriter of mortgage bonds may have to salvage another hedge fund. The S&P 500 Index lost 1.6 percent over the past two days.

``Concern over falling Asian stock markets is strong,'' said Toru Umemoto, chief currency analyst at Barclays Capital in Tokyo. ``Investors will likely buy the yen while the market focuses on the issue of risk reduction.''

The yen may move between 122 and 125 per dollar in one month, Umemoto said. Japan's Nikkei Stock Average declined 0.3 percent and the Morgan Stanley Capital International Asia-Pacific index of leading regional shares fell 0.1 percent.

Have Trouble

Japan's 0.5 percent cost of borrowing compares with 5.25 percent in the U.S. and 4 percent in the European Union. That helped the currency decline 4.5 percent against the dollar and 5.3 percent versus the euro this quarter.

The VIX volatility index, a Chicago Board Options Exchange gauge reflecting traders' expectations of volatility in the stock market, yesterday rose 5.7 percent to 16.65.

Against the yen, the Australian and New Zealand dollars have risen 3.6 percent and 5.2 percent this month, respectively, as investors funneled funds into securities in those two nations in search of higher returns. Australia's dollar traded at 104.40 yen from 104.71 and New Zealand's dollar was at 94.39 yen from 94.61.

``The carry trades are going to have trouble performing as well as they have done of late,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``The yen is going to strengthen a little bit on the rise in volatility.''

To contact the reporter on this story: Kosuke Goto in Tokyo at at kgoto2@bloomberg.net

Last Updated: June 25, 2007 21:42 EDT