Dollar and yen post record monthly gains

The yen and the dollar rose against the euro and posted record monthly gains as signs of a global recession led investors to seek safety.

The euro also weakened as inflation in the 15 nations that share the currency slowed to the lowest since January, making room for the European Central Bank to lower borrowing costs. The Bank of Japan cut its target lending rate to 0.3 per cent.

"The yen should remain relatively firm on global economic worries,'' said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. "The convergence of interest rates should play in favour of the dollar."

The yen climbed 1.5 per cent to 125.53 per euro in late trading in New York on Friday from 127.31 Thursday. The yen traded at 98.51 against the dollar, compared with 98.61. The dollar rose 1.4 per cent to $1.2739 versus the euro from $1.2915.

Japan's currency appreciated 19 per cent against the euro in October on speculation the global economic slump will encourage investors to sell higher-yielding assets and pay back low-cost loans in the yen. It was the currency's biggest monthly gain since the euro's introduction in 1999.

The dollar rose a record 10.6 per cent last month against the euro and fell 7.2 per cent against the yen, the biggest decline since 1998, when hedge fund Long-Term Capital Management LP collapsed.

Honda Earnings

The strength in the yen has eroded Japanese exporters' overseas income. Honda Motor Co., Japan's second-largest automaker, cut its operating profit forecast for the year ended in March 2009 by 13 per cent to 550 billion yen ($5.6 billion, Dh20.55 billion) last week.

Japan's Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo that abrupt increases in currency volatility are "undesirable."

The yen increased 3 per cent to 65.29 against the Australian dollar on Friday and 1.7 per cent to 58.20 versus the New Zealand currency on speculation carry trades will unwind.

The Aussie dropped 22 per cent against the yen last month, while the kiwi, as New Zealand's currency is known, decreased 19 per cent. The target lending rates are 6 per cent in Australia and 6.5 per cent in New Zealand.

Volatility implied by dollar-yen options expiring in one month, a measure of expectations for future currency moves, rose to 31.63 per cent from 31.16 per cent Thursday.

It reached 41.79 per cent on October 24, the highest since Bloomberg began compiling data in December 1995. Higher volatility can discourage carry trades by making profits harder to predict.

The euro weakened as the European Union statistics office reported that inflation eased to 3.2 per cent in October, encouraging speculation that the ECB will cut interest rates for the second time in less than a month in response to the financial and economic crisis.