The yen rose to near a two-year high against the euro and gained versus the dollar as the debt- rating downgrade of American International Group Inc. fueled concern credit markets are seizing up after the collapse of Lehman Brothers Holdings Inc.
The yen also jumped to the highest level in more than two years against the Australian and New Zealand dollars as a global stock-market rout encouraged investors to cut purchases of higher-yielding assets funded in Japan. The dollar advanced versus the euro before a meeting of the Federal Reserve today at which traders expect policy makers to cut interest rates to buoy financial markets.
“If I was going to take a position right now, it would be to go long yen,” said David Powell, a currency strategist with Bank of America Corp. in London. “Risk aversion has taken over.” A long position is a bet that a currency or asset will increase in price.
The yen rose to 147.79 per euro as of 6:51 a.m. in New York, from 149.11 yesterday. It traded at 147.54 on Sept. 11, the strongest since August 2006. The Japanese currency climbed to 104.16 per dollar, from 104.66. The dollar strengthened to $1.4186 per euro, from $1.4243 yesterday, when it reached $1.4481, the lowest level since Sept. 4.
`End of the World’
Money-market rates surged today as lending between banks all but seized up. The London interbank offered rate, or Libor, for overnight dollars more than doubled, the British Bankers’ Association said.
AIG’s credit was downgraded by Standard & Poor’s and Moody’s Investors Service, threatening efforts to raise emergency funds to keep the company afloat. The largest U.S. insurer by assets is seeking $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co., according to people familiar with the situation.
Lehman filed for bankruptcy yesterday after Bank of America and Barclays Plc pulled out of talks to buy the New York-based firm.
“It’s the end of the world as we know it, at least that is how it feels,” said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. “The main beneficiary has been the yen, which is not a surprise, it being the typical risk-aversion play and given the prospect that Japanese outflow to foreign markets dries up.”
The yen gained 2.3 percent to 82.47 versus the Australian dollar and 1.5 percent to 68.00 against the New Zealand dollar as the demand for riskier assets waned and investors reduced carry trades. In such transactions, traders borrow in low interest-rate countries to buy higher-yielding assets elsewhere, earning the spread between the two.
Japan’s 0.5 percent target lending rate compares with 4.25 percent in Europe, 7 percent in Australia and 7.5 percent in New Zealand.
Money Markets
The European Central Bank offered 70 billion euros ($99.8 billion) in a one-day money-market auction today. The Bank of Japan added a total of 2.5 trillion yen ($24 billion) and the Bank of England pumped in 20 billion pounds ($36 billion). The so-called Libor OIS spread, which measures the availability of funds in the market, widened 11 basis points to 116 basis points today, the most since at least December 2001.
“All eyes of the currency markets are on the money markets,” said Steve Barrow, a currency strategist with Standard Bank Plc in London. “The key issue is whether there is a systemic meltdown in the interbank market. That could cause further dislocations.”
Futures on the Chicago Board of Trade showed a 90 percent chance the Fed will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point when it meets today, compared with 68 percent yesterday and no chance a week ago. Policy makers are scheduled to announce their decision at 2:15 p.m. in Washington.
Volatility Spikes
Implied volatility on one-month euro-dollar options reached 14.46 percent today, the highest level since the aftermath of the Sept. 11, 2001, terrorists attacks, indicating traders see more price fluctuation in the next month. Volatility on one- month dollar-yen options touched 18.28 percent today, the highest since March 19.
“The market is expecting the Fed to calm things down, whether they actually will is another matter,” said Henry Wilkes, head of foreign-exchange trading at Brown Brothers Harriman in London. “We’re heading into unprecedented waters with the concerns about AIG and the contagion into the insurance market. A lot of people are a bit shell-shocked.”
The euro fell even after the ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to minus 41.1, from minus 55.5 in August. That’s the highest reading since April this year. Economists in a Bloomberg News survey expected an increase to minus 53.
The dollar has gained about 11 percent since touching an all-time low of $1.6038 per euro on July 15, sliding as the European economy slowed and crude oil dropped more than a third from its July peak of $147.27 a barrel.