Yen touches 18 month high on risk reduction

The yen strengthened against all 16 of the most-traded currencies, rising beyond 110 per dollar for the first time in 1 1/2 years, as investors reduced holdings of higher-yielding assets bought with loans in Japan.

The currency rose as much as 3 per cent versus the Australian dollar and 1.3 per cent against the euro as speculators retreated from so-called carry trades.

Investors cut holdings of riskier assets after Morgan Stanley analysts downgraded HSBC Holdings Plc because of mortgage defaults and Deutsche Bank AG estimated that losses from falling values of sub-prime mortgages may reach $400 billion worldwide.

"We've seen the carry trade unwind on credit-market concerns," said Sue Trinh, a senior currency strategist in Sydney with RBC Capital Markets, the most accurate forecaster of the yen's value against the euro in the second quarter, according to data compiled by Bloomberg.

"The big beneficiary at the moment is the yen."

The yen traded at 109.74 per dollar at 11:17 a.m. in London, the highest since May 2006, from 110.69 late in New York on November 9. It was at a two-month high against the euro at 159.86, from 162.48 late last week.

The dollar rose the most in three weeks against the euro to $1.4561 from $1.4678 late last week.

It fell to $1.4752 on November 9, an all-time low against the synthetic euro, a theoretical value that estimates where the currency would have traded before its inception.

The prior record was $1.4557 set in 1992. Trading may be less than normal today because of the US Veterans Day holiday.

Investors pared carry trades as concern grew about writedowns on securities tied to defaults on US sub-prime mortgages.