Nov. 29 (Bloomberg) -- The yen gained for a fourth straight month against the euro, the longest wining streak since 1999, as the deepening global economic slump prompted investors to sell high-yielding assets and pay back loans made in Japan.
The euro weakened against the dollar for a fifth month as investors added to bets the European Central Bank will cut interest rates next week after inflation in the region slowed by the most since at least 1991. Russia’s ruble declined against the dollar to the weakest level since March 2006 as the central bank let the currency depreciate and raised interest rates to halt an exodus of foreign capital.
“The yen is still our favorite currency,” said Derek Halpenny, head of global currency research at Bank of Tokyo- Mitsubishi Ltd. in London in an interview on Bloomberg Television. “The interest-rate differential argument is still very, very powerful for the Japanese yen as yields around the world continue to plunge. Past performance tells you that the Japanese yen is going to be the currency that outperforms.”
The yen gained 3.4 percent to 121.22 per euro, from 125.30 at the end of October. The currency advanced 3.1 percent this month to 95.52 per dollar, from 98.46. The euro dropped 0.3 percent to $1.2691, from $1.2726 on Oct. 31.
The ruble slumped as low as 27.99 per dollar yesterday, the weakest since March 2006, as the 63 percent drop in crude oil prices from a July peak erodes the country’s export revenue. The currency declined 3 percent against the dollar and the euro this month.
Russia, India
Bank Rossii widened the ruble’s trading band yesterday for the second time this week by about 30 kopeks (1 U.S. cent), or 1 percent, on each side, according to Mikhail Galkin, head of fixed income and credit research at MDM Bank in Moscow. The central bank said yesterday it will raise its benchmark refinancing rate to 13 percent from 12 percent to help stem currency losses.
India’s rupee fell yesterday the most in two weeks, losing 1.4 percent to 50.1075 per dollar, after terrorist attacks across Mumbai left at least 124 people dead. The rupee lost 1.3 percent this month.
The Thai baht dropped to 35.56 per dollar yesterday, the lowest level since February 2007, after the government declared a state of emergency at airports in Bangkok, which were seized and shut by anti-government protesters this week. It lost 1.2 percent this month on concern political unrest will slow growth in Southeast Asia’s second-largest economy.
Banks Rate Cuts
Japan’s currency strengthened 9.4 percent against the New Zealand dollar this month, 7.8 percent versus the British pound, and 5 percent against the Australian dollar as investors pared carry trades in which they buy higher-yielding assets with funds borrowed in low-interest-rate countries. The Bank of Japan’s 0.3 percent benchmark rate is the lowest among developed nations.
The Reserve Bank of Australia will lower its main interest rate three quarters of a percentage point to 4.5 percent on Dec. 1, and the New Zealand central bank will cut its key borrowing costs to 5 percent from 6.5 percent two days later, according to the median forecast of economists surveyed by Bloomberg News. The Bank of England will reduce its benchmark lending rate one- percentage point to 2 percent on Dec. 4, according to a separate forecast.
The euro fell 1.5 percent to 82.52 pence yesterday, the biggest drop since June 3, 2001, after the European Union statistics office in Luxembourg said inflation in the region slowed to 2.1 percent in November from 3.2 percent in October. A separate report showed unemployment in the region rose to 7.7 percent in October from 7.6 percent in September, the highest level since January 2007.
‘Least Resistance’
Investors added to bets the ECB will cut its main refinancing rate about 75 basis points by March from 3.25 percent. The implied yield on three-month Euribor futures contracts expiring in March fell to 2.67 percent yesterday, from 3.15 percent at the end of October. The yield averaged 16 basis points above the ECB’s benchmark over the past year.
The ECB will cut its benchmark lending rate by half a percentage point to 2.75 percent on Dec. 4, according to the median of 56 economist forecasts in a Bloomberg News survey.
“The ECB has to come to the party, and they have to be aggressive cutting rates,” said Lane Newman, a director of currency trading at ING Financial Markets LLC in New York. “To buy the dollar is the path of least resistance. You’d better be prepared for a worse-than-expected time ahead.”
‘Addition Downside’
The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, climbed to 88.463 on Nov. 21, the highest since April 2006. Investors sought refuge in Treasuries from a global recession, sending the yield on two-year notes below 1 percent on Nov. 20, the lowest since regular sales began in 1975.
The Federal Reserve said on Nov. 25 it will assign $800 billion in new funding to bolster credit flows to homebuyers, consumers and small businesses and will take on credit risk by buying debt.
Investors should buy the euro versus the greenback because repatriation of U.S. investments abroad and demand for dollar funding is waning, according to Bank of America Corp.
The Fed’s support of financial markets will flood the economy with excessive dollars, creating “additional downside risks” for the U.S. currency, strategists David Powell and Robert Sinche wrote in a research note yesterday.
“The recent advance of the dollar rests on a weak foundation,” Powell and Sinche wrote. “The rapid expansion of a country’s monetary base should prove to be inconsistent with a strengthening of its currency.”
The dollar may weaken to $1.4180 per euro, a 50 percent retracement of its rally from a record low of $1.6038 in July to a 2 1/2-year high of $1.233 in October, they wrote.
source: bloomberg.com
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