Yen Near Three-Week Low Versus Australian Dollar as RBA Meets

By Kosuke Goto and David McIntyre

Feb. 5 (Bloomberg) -- The yen traded near a three-week low against the Australian dollar on speculation the central bank of the southern hemisphere nation will raise its benchmark interest rate today.

The currency may weaken for a fourth day against the New Zealand dollar as a decline in expectations for price swings encourages investors to purchase higher-yielding assets funded in Japan. Volatility fell to the lowest level in almost a month, improving confidence in so-called carry trades.

``You expect the yen to weaken on the back of carry trades rallying,'' said Joanne Masters, a currency strategist at Macquarie Bank Ltd. in Sydney. ``There's a bit more to go for the Australian dollar on the confirmation of a rate hike.''

The yen traded at 96.82 against the Australian dollar at 9:11 a.m. in Tokyo from 96.91 late in New York yesterday, when it fell to 97.21 yen, the lowest since Jan. 15. The Australian dollar was at 90.71 U.S. cents after reaching an almost three- month high of 91.01 cents.

Japan's currency was little changed at 106.68 per dollar and 158.18 a euro, from 106.71 and 158.26 in New York yesterday, respectively. The dollar traded at $1.4825 per euro from $1.4830.

Australian Interest Rate

All 27 economists surveyed by Bloomberg News forecast the Australian central bank will raise its benchmark rate a quarter- percentage point to 7 percent, the highest level since 1996. Policy makers will announce their decision at 2:30 p.m. in Sydney.

In carry trades, speculators get funds in a country with low borrowing costs such as Japan and invest in one with higher returns, earning the spread between the two. Japan's benchmark rate is 0.5 percent, the lowest among industrialized nations.

One-month implied volatility for the yen fell to 11.48 percent today, the lowest since Jan. 10. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options.

Service Growth

Gains in the dollar may be limited before a U.S. report today that is likely to show service industries expanded in January at the slowest pace in almost a year. The Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of the economy, dropped to 53 from 54.4, according to the median estimate of economists in a Bloomberg News survey.

``The dollar is an unreliable currency now,'' said Yuuki Sakurai, a Tokyo-based investment manager at Fukoku Mutual Life Insurance Co., which manages the equivalent of $41.5 billion in assets. ``The U.S. housing markets will remain sluggish, buffeting the economy.''

The U.S. currency may fall to 105.80 yen this week, Sakurai said.

ECB

The euro may strengthen for the second day as traders cut bets that the European Central Bank will reduce borrowing costs this year. ECB policy maker Klaus Liebscher said the central bank will do what is needed to prevent a price-wage spiral from boosting inflation, according to a statement published by the Austrian central bank.

The ECB will leave its benchmark interest rate at a six- year high of 4 percent on Feb. 7, all 55 economists surveyed by Bloomberg forecast. Interest-rate futures show the implied rate on the June Euribor contract rose to 4.03 percent yesterday, from 3.96 percent on Feb. 1. The rate averaged 18 basis points more than the ECB's benchmark from 1999 until August, when the collapse of the U.S. subprime-mortgage market sparked a squeeze on credit.

The dollar will trade at $1.48 per euro by the end of this quarter and $1.40 by year-end, according to the median forecast of 44 analysts in a Bloomberg News survey.