Yen drops on US Fed rate cut hope

ASIAN CURRENCIES ROUND-UP

The yen fell to a one-month low against the dollar and euro as speculation the Federal Reserve will accelerate interest-rate cuts boosted stocks and encouraged purchases of higher-yielding assets funded by loans in Japan.

Japan's currency declined versus 15 of the 16 most-actively traded currencies as Asian and European equities rose and traders increased bets on a half-percentage point cut by the Fed today. The yen has weakened 1 per cent against the dollar in the past five days.

The yen dropped to 112.14 a dollar, the lowest since November 9, before trading at 111.95 at 9:43 am in London, from 111.71 late in New York yesterday. It may fall to as low as 112.60 a dollar today, according to From.

The yen also slipped to 164.76 a euro, from 164.33. The Japanese currency has declined the most, since December 5, against the Australian and New Zealand dollars, favourites of the carry trade, in which traders borrow in low-yielding currencies to invest in higher-interest-rate assets elsewhere.

The Bank of Japan's benchmark interest rate is 0.5 per cent, the lowest among industrialized nations, compared with 8.25 per cent in New Zealand, 6.75 per cent in Australia and 5 per cent in Norway. The Australian dollar has gained 2.9 per cent and New Zealand's 2.7 per cent against the yen in the past five days.

Yuan rises
The yuan rose the most in a month on speculation that China will raise the interest rates after inflation accelerated to the fastest in almost 11 years.

The currency reached the strongest against the dollar since the end of a fixed exchange rate in 2005, as central bank Governor Zhou Xiaochuan said that China will use exchange-rate policy to cool the economy. The US Treasury Secretary Henry Paulson, who starts talks in China tomorrow, said last week that a stronger yuan would also curb global trade imbalances.

"China's policy makers are running hard merely to keep up with the economy,'' said Claudio Piron, head of Asian currency research at JPMorgan Chase in Singapore. "The case for accelerated yuan appreciation continues to build, with or without Paulson's visit.''

The currency rose 0.2 per cent to 7.3805 a dollar as of the 5:30 pm close in Shanghai from 7.3952 late yesterday, according to the China Foreign Exchange Trade System. It touched 7.3770, the highest since the link to the US currency was scrapped in July 2005.

The yuan climbed for a third day after a government report showed that consumer prices rose 6.9 per cent in November from a year earlier, compared with 6.5 per cent in October and above the median estimate in a Bloomberg News survey of 6.5 per cent.

China's inflation report takes "center stage today,'' said Piron.

Philippine peso; Malaysian ringgit gain
Currencies such as the Philippine peso and Malaysian ringgit gained on speculation the US Federal Reserve will cut interest rates, spurring investors to buy higher-yielding emerging-market assets.

The peso rose for an eighth day before the US rate meeting at which policy makers are expected to reduce the benchmark rates by at least a quarter percentage point. The peso climbed to the strongest in 7 1/2 years on expectations the premium offered by the nation's yields over those in the US will widen.

"A 25-basis point Fed cut is a 100 per cent probability and lower rates weaken the dollar,'' said Rafael Algarra, treasurer at Security Bank Corp. in Manila. "A wider rate differential could fuel the peso even more.''

The currency rose 0.4 per cent to 41.41 a dollar as of 4:49 pm in Manila, according to Tullett Prebon, the world's second-largest inter-dealer broker. The peso is trading near the highest since May 2000 and is the best performing currency in Asia outside Japan this year.

The peso was also supported by record remittances from Filipinos working overseas and a government report today showing exports grew faster than expected in October, Algarra said.

Local policy makers will meet again on December 20 after lowering the borrowing costs three times this year to 5.5 per cent.

Traders see a 72 per cent chance the Fed will lower its target rate for overnight loans between banks to 4.25 per cent versus 52 per cent a week ago, as indicated by the futures on Chicago Board of Trade. They are assigning 28 per cent odds of a half-point cut.