Yen Rises; Subprime Losses Spur Sales of Higher-Yielding Assets

The yen rose to the highest in more than two years against the dollar as losses related to U.S. subprime mortgages widened, prompting investors to sell higher- yielding assets funded by loans from Japan.

The currency strengthened against all 16 of the most- actively traded currencies after Freddie Mac, the second-biggest U.S. mortgage-finance company, reported a record loss and the Federal Reserve reduced its 2008 economic growth forecast. Crude oil rose above $99 a barrel, which may slow consumer spending and put pressure on the central bank to cut interest rates.

``Subprime problems are far from done,'' said Saburo Matsumoto, senior manager of foreign-exchange sales at Sumitomo Trust & Banking Co. in Tokyo, Japan's fifth-largest lender by assets. ``The yen is being buoyed by it.''

Japan's currency climbed to 108.93 per dollar, the highest since September 2005, before trading at 109.15 as of 2:17 p.m. in Tokyo, compared with 109.97 late yesterday in New York. It rose to 161.96 a euro from 163.21. The dollar traded at $1.4839 per euro, after reaching $1.4852 yesterday, the lowest since the single European currency's debut in 1999.

Japan's currency may rise to 107 per dollar this year, Matsumoto said.

Australia's dollar slipped 1.4 percent to 96.71 against the yen from 98.13, New Zealand's dollar weakened 1.4 percent to 82.93 yen from 84.15, and South Korea's won declined 1.5 percent to 8.4959.

Dollar Losses

The dollar may extend losses as traders bet the Fed will cut interest rates for a third time to keep the economy from slipping into recession. The U.S. consumes one quarter of the world's oil, the price of which has risen to a record, posing a dilemma to the central bank in cutting rates at the same time as keeping inflation at bay.

``This is one of the biggest challenges the central bank faces, weighing up the near-term risks of economic weakness with more medium-term inflationary pressures,'' said Adrian Foster, director of currency sales in Beijing at Dresdner Kleinwort, the investment bank owned by Germany's Allianz SE. ``It's very much a dollar decline.''

The currency may fall to $1.50 per euro by year-end, Foster said.

Oil had a correlation of minus 0.89 in the past month with the U.S. Dollar Index traded on ICE Futures U.S. in New York, which measures the currency against six major counterparts including the euro, yen and Swiss franc. A reading of minus 1 would mean the two moved in opposite directions.

Full story at Bloomberg