- The yen fell against the euro and dollar for a second day as a rebound in global stocks prompted investors to return to the so-called carry trade.
The Japanese yen was the worst performer among the 16 most- actively traded currencies as stocks climbed after the Federal Reserve unexpectedly cut its discount rate Aug. 17. Currencies that benefit from high interest rates, such as the U.K. pound and Australian dollar, strengthened the most versus the yen.
``We have seen the top of the yen,'' said Toshi Honda, a currency strategist at Mizuho Corporate Bank Ltd. in London. ``I don't think the yen has much room to appreciate further. There are still investors sitting on their carry-trade positions.''
The currency fell to 155.19 per euro as of 8:27 a.m. in New York from 154.10 late on Aug. 17. It also dropped to 115.20 versus the dollar from 114.36. Honda expects the yen to trade between 115 and 120 against the dollar before the year-end.
The MSCI Asia-Pacific Index rose as much as 4.3 percent. European stocks also advanced for a second day, with the Dow Jones Stoxx 600 Index adding as much as 1.6 percent. U.S. stock- index futures advanced.
The New Zealand currency, a favorite of the carry trade, climbed to 80.51 against the yen, from 79.74 on Aug. 17. Australia's dollar rose to 92.63 from 91.22 and the pound advanced to 228.95 from 226.57.
The euro strengthened for a second day against the dollar on speculation the Fed's discount-rate cut will encourage investors to resume purchases of European financial assets. Lehman Brothers Holdings Inc. recommended buying shares of financial companies.
Rate-Cut Signal
Fed funds futures show traders are betting on a 60 percent chance policy makers will cut the benchmark rate by 50 basis points to 4.75 percent at the Sept. 18 meeting.
``Markets interpreted the Fed's move as signaling that a rate cut could come as early as September,'' said Tom Vosa, head of market economics at National Australia Bank in London. ``We have moved forward our expectations for U.S. rate cuts.''
Europe's single currency traded at $1.3485 from $1.3475.
The Fed lowered the rate it charges to lend money to banks by half a percentage point to 5.75 percent. It acknowledged an extraordinary policy shift is needed to contain the U.S. subprime-mortgage collapse that triggered liquidity concerns and a rout of global stock markets. U.S. stocks surged, sending the S&P 500 to its biggest rally in four years.
Citigroup Forecast
Citigroup Inc. raised its year-end forecast for the yen by 15 percent as financial market turmoil sparked by losses on U.S. subprime mortgages will reduce appetite for carry trades.
Japan's currency will rise to 105 against the dollar by year-end, the world's third-biggest currency trader said, compared with a previous forecast of 121.
The yen was the best performer of the 16 most-active currencies in the past month as U.S. mortgage losses fueled risk aversion, discouraging Japan's investors from buying currencies such as Australian and New Zealand dollars. Japan's key interest rate of 0.5 percent, the lowest among major economies, had prompted local investors to seek higher-yielding assets abroad, pushing the yen to a 4 1/2-year low against the dollar in June.
Japanese investors cut yen short positions against the dollar, bets the currency will weaken, to a two-month low. The difference in the number of wagers on a decline in the yen compared with those on a gain, known as net shorts, fell to 83,329 contracts on Aug. 17, the lowest since June 29, according to the Tokyo Financial Exchange.
`More Losses'
The dollar's gains versus the yen were curbed by speculation the subprime crisis will spread to other parts of the world's largest economy, prompting the Fed to lower rates.
``There's a risk of more losses linked to subprime loans,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The Fed may have to cut the fed funds rate. It's a negative for the dollar.''
Delinquencies among U.S. subprime mortgages may make investors less willing to provide credit, prompting a ``more significant effect on aggregate spending,'' Fed Vice Chairman Donald Kohn wrote in an Aug. 8 research paper for a conference hosted by Australia's central bank in Sydney today.
The ``direct effect'' of the delinquencies on consumer spending may be modest, Kohn wrote.
Fed policy makers last week dropped language showing a bias toward fighting inflation and highlighted a rising threat to economic growth.
To contact the reporter on this story: Aaron Pan in London at apan8@bloomberg.net ; Kosuke Goto in Tokyo at at kgoto2@bloomberg.net
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