Yen Falls to Six-Week Low Against Dollar as Global Stocks Rally

Dec. 24 -- The yen fell to a six-week low against the dollar and dropped versus the euro as global stocks rallied, increasing demand for higher-yielding assets funded by loans in Japan.

Japan's currency dropped against 15 of its 16 most actively traded counterparts today as a $6.2 billion investment in Merrill Lynch & Co. eased concern that subprime losses will cut into carry trades. A U.S. report this week may show durable- goods orders rebounded in November, suggesting the economy is weathering the worst housing slump in 16 years.

``We have positive risk appetite across the board as fear of an imminent recession in the U.S. fades,'' said Boris Schlossberg, senior strategist in New York at currency dealer DailyFX.com. ``The bias is for the downside for the yen.''

The yen fell to 114.38 per dollar at 10:59 a.m. in New York, from 114.04 on Dec. 21, touching 114.40, the weakest since Nov. 7. Japan's currency also dropped to 164.73 per euro, compared with 163.98 at the end of last week. The dollar traded at $1.4405 per euro, compared with $1.4382. The yen may decline to 115 by year-end, Schlossberg said.

The pound fell to 72.88 pence per euro, the lowest since the European currency was introduced in 1999, as a report showing a decline in housing prices stoked speculation that the Bank of England will cut its 5.5 percent target lending rate to shore up the economy. The pound is headed for its first annual drop versus the European currency since 2004.

China's Yuan

The yuan climbed to the strongest since a dollar link was scrapped two years ago after China's central bank proposed using currency gains to curb money supply, the official Securities Times reported today, not identifying where it got the information. The yuan rose as high as 7.3399 per dollar from 7.3678 at the end of last week.

Japan's currency fell at least 0.6 percent against the South African rand and the New Zealand and Australian dollars today on speculation that gains in stocks will encourage the carry trade. In such a trade, investors borrow funds in countries with lower lending rates and use the cash to buy assets in nations that offer higher returns. Currency fluctuations can erase profits.

The Bank of Japan last week held its target lending rate at 0.5 percent, the lowest among industrialized nations. The benchmark borrowing cost is 11 percent in South Africa, 8.25 percent in New Zealand and 6.75 percent in Australia.

Stocks Advance

U.S. stocks rose after Merrill Lynch, the world's largest brokerage, said it will receive a $6.2 billion cash infusion from Singapore's sovereign wealth fund and New York-based money manager Davis Selected Advisors LP. The Standard & Poor's 500 Index increased 0.6 percent

``The Merrill news is good for equities, and the yen is trading on the back of equities today,'' said Matthew Kassel, director of proprietary trading in New York at ING Financial Markets LLC. ``It's a really slow day.''

Currency trading will be about 25 percent of normal levels today as Japan observes a holiday and many investors take a vacation day before the Christmas break, said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia's fourth-biggest lender.

The U.S. currency has gained against 12 of the 16 major currencies in the past month on speculation that signs of economic resilience and accelerating inflation will discourage the Fed from cutting borrowing costs next month.

Bets Against Dollar

Futures traders trimmed their bets that the euro will gain against the U.S. dollar in the week ended Dec. 18, according to the Commodity Futures Trading Commission. The difference in the numbers of wagers in favor of the euro -- the so-called net long position -- fell to 31,149 contracts from 63,374 contracts in the prior week.

``The data reflect some sentiment change,'' as traders becomes less negative on the dollar, said Camilla Sutton, co- head of currency strategy in Toronto at Scotia Capital Inc.

U.S. demand for cars, aircraft and other items made to last several years probably increased 2 percent in November after a revised 0.2 percent drop a month earlier, according to the median forecast of 65 economists surveyed by Bloomberg News. The Commerce Department will release the report on durable-goods orders on Dec. 27 in Washington.

The Fed's preferred measure of inflation increased 2.2 percent from November 2006, the biggest year-over-year gain since March, the Commerce Department reported last week.

The yen is heading for its eighth annual decline against the euro, having fallen 4.5 percent. Against the dollar, it's up 4.2 percent this year, its best performance since 2004.

The dollar has weakened against 15 of the 16 most active currencies this year as widening credit-market losses and the housing slump led the Federal Reserve to cut borrowing costs three times to 4.25 percent to prop up economic growth.

Interest-rate futures on the Chicago Board of Trade indicate 74 percent odds that the Fed will reduce its benchmark rate a quarter-percentage point at its Jan. 30 meeting, compared with a 94 percent chance a month ago.