Yen Advances as Moody's Prepares Rating Cuts on Subprime Losses

Dec. 3 -- The yen advanced from the lowest in two weeks against the dollar after Moody's Investors Service said it is preparing the biggest credit rating cuts since subprime mortgage defaults rocked financial markets.

The yen rose versus all of the 16 most-traded currencies as investors sold higher-yielding assets funded by loans from Japan, known as carry trades. The dollar fell against the euro on speculation a report will show slowing manufacturing growth, adding to pressure on the Federal Reserve to cut interest rates.

``The Moody's news over the weekend suggesting more writedowns prompted yen buying,'' said Sue Trinh, a currency strategist in Sydney at RBC Capital Markets, the second-most accurate exchange rate forecaster in Bloomberg surveys. ``This is likely to continue for the next two months.''

The yen gained to 110.57 per dollar at 11:25 a.m. in Tokyo from 111.24 late in New York Nov. 30, the weakest since Nov. 16. Japan's currency traded at 162.31 per euro from 162.82. The dollar fell to $1.4666 per euro from $1.4633. The yen may rise to 110.50 per dollar and 162 per euro today, Trinh said.

The Australian and Canadian dollars, favorites of the carry trade, fell the most against the yen. Australia's dollar dropped 0.8 percent to 97.59 yen. Canada's dollar slipped 0.7 percent to 110.64 yen. Moody's may lower ratings on $105 billion of debt sold by structured investment vehicles, the credit-rating agency said in a statement Nov. 30.

The U.S. dollar traded at $2.0568 against the British pound from $2.0563 and was at 1.1280 versus the Swiss franc from 1.1318.

Rising Volatility

Volatility implied by one-month dollar-yen options rose to 12.100 percent from 11.925 percent on Nov. 30. Greater exchange- rate fluctuation risks may discourage carry trades. In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate.

The U.S. currency extended this year's decline against the euro to 10 percent. The Institute for Supply Management's factory index, due at 10 a.m. today, fell to 50.7 in November from 50.9 in October, according to a Bloomberg News survey of economists. Readings greater than 50 signal expansion.

The yield premium investors earn on two-year German bunds over similar-maturity U.S. Treasuries rose to 84 basis points, the most since December 2003. The U.S. government last week cut its forecast for economic growth in 2008 to 2.7 percent from a 3.1 percent projected in June.

``We may see further negative impact on the U.S. economy, suggesting rate cuts this month and next month,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow, Japan's largest currency broker. ``The dollar may drop'' to $1.4690 per euro today, he forecast.

Fed Rate Bets

The U.S. currency will trade at $1.45 per euro by the end of June and 111 against the yen, according to the median estimate of 38 analysts and brokerages surveyed by Bloomberg.

Futures contracts on the Chicago Board of Trade show a 62 percent chance the Fed will lower its key rate a quarter- percentage point to 4.25 percent on Dec. 11, and 55 percent odds of a cut to 4.00 percent on Jan. 30.

The euro may fall after technical charts traders use to study price movements suggested the currency may reverse its 9 percent rally since August.

On the daily chart of the currency's moving average convergence-divergence, the line measuring the difference between 12- and 26-day moving averages last week fell below the nine-day moving average, which is typically a sell signal.

``The euro is in a downtrend on the charts,'' said Masashi Kurabe, head of the foreign-exchange sales & trading group in Hong Kong at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender. ``The key support is around $1.4600,'' which is the trend line connecting the lows of Aug. 16-17, Sept. 4-5 and Oct. 22.

Support is where buy orders may be clustered. The MACD, a momentum indicator, shows whether a price shift is a change in trend by comparing moving averages.