Yen May Extend Drop Versus Euro as Stocks Fuel Risk Appetite

Oct. 2 (Bloomberg) -- The yen may fall for a sixth day versus the euro, its longest slide since January, as rallying stocks encourage carry-trade investors to borrow in Japan to buy higher-yielding assets elsewhere.

Since the Federal Reserve cut its benchmark overnight rate on Sept. 18, Japan's currency has lost 4.9 percent versus the New Zealand dollar and 4.4 percent against the Australian dollar, both beneficiaries of the carry trade. The Dow Jones Industrial Average rose to a record yesterday as investors speculated the global economy will continue to expand.

``Risk appetite is obviously coming back to the market,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``The stabilization in the global stock market provided a shot in the arm for carry trades.''

The yen traded at 164.64 per euro at 5:39 a.m. in Tokyo, near the weakest since Aug. 9, after falling 0.5 percent yesterday. Japan's currency traded at 115.69 per dollar after decreasing 0.8 percent.

The yen has fallen 1.5 percent versus the euro since Sept. 18, when the Fed reduced its key rate 0.5 percentage point to 4.75 percent. Japan's rate of 0.5 percent is the lowest among major economies and compares with 8.25 percent in New Zealand and 6.5 percent in Australia.

The Dow Jones Average rallied yesterday as investors speculated the worst of the subprime fallout may be over. The Morgan Stanley Capital International Asia-Pacific Index reached an all-time high.

Economic Outlook

The economy of the 13 countries that use the euro will expand 2.6 percent in 2007 compared with Japan's 1.8 percent, according to Deutsche Bank AG. The U.S. economy will grow 1.9 percent this year and 2.2 percent in 2008 as rate cuts help the economy weather the housing slump, the bank forecasts.

Lehman Brothers Holdings Inc. said yesterday an in-house measure showed yen carry trades have increased at an ``impressive'' rate, helped by the Fed's half-point cut.

The firm said in a note to clients yesterday its yen carry- unwind signal has fallen to 19 percent from 95 percent in early August, showing investment in the strategy has increased.

The implied volatility of a one-month euro-yen option was 10 percent yesterday, down from 17.5 percent on Aug. 16. A decline in volatility encourages investors to borrow in Japan and buy assets overseas where yields are higher.

The National Association of Realtors is forecast to report today that the number of Americans entering into contracts to buy previously owned homes fell 2.1 percent in August, according to the median estimate of 30 economists surveyed by Bloomberg. Pending home sales fell 12.2 percent in July, the most since records began in 2001.

The Turkish lira, the biggest gainer among emerging-market currencies versus the yen this year, rose 1.3 percent against the currency yesterday. Turkey's benchmark rate is 17.25 percent.

``The carry trade is fairly well established and the conditions for the trade remain in place,'' said Win Thin, a currency strategist in New York at Brown Brothers Harriman & Co.