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Forex: Yen Declines to More Than Four-Year Low Versus Dollar on Sales The yen declined to the lowest against the dollar in more than four years after a Japanese government report showed a drop in retail sales last month.   Forex: Yen Declines to More Than Four-Year Low Versus Dollar on Sales By Min Zeng and Bo Nielsen Jan. 29 (Bloomberg) -- The yen declined to the lowest against the dollar in more than four years after a Japanese government report showed a drop in retail sales last month. The yen also weakened against the euro, pound and Swiss franc on concern waning spending will encourage the Bank of Japan to delay raising interest rates. Barclays Capital, Standard Chartered Bank Plc and RBC Capital Markets dropped forecasts for a 2007 yen gain last week after policy makers kept borrowing costs at 0.25 percent on Jan. 18. ``Low interest rates in Japan are encouraging people to move money out of the country,'' said Adnan Akant, head of foreign exchange in New York at money manager Fischer Francis Trees & Watts, which has $42 billion in assets. ``There is no dramatic economic activity in Japan right now, making it hard for the BOJ to raise interest rates.'' Japan's currency fell to 121.76 per dollar at 4:19 p.m. in New York from 121.54 on Jan. 26. It touched 122.19, the weakest since 122.85 on Dec. 13, 2002. It also fell to 157.73 per euro from 156.99, approaching its record low of 158.62 set on Jan. 24. The euro's gain against the dollar accelerated on rumors that European Aeronautic, Defence & Space Co., the maker of Airbus airplanes based in Le Carre, the Netherlands, would allow a Russian bank or state company to buy a 20 percent stake, said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. The European currency traded at $1.2954 from $1.2916. The yield on the three-month Euribor futures contract for September rose 2 basis points to 4.18 percent, the highest since July 2004. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the European Central Bank's benchmark rate since 1999. Carry Trade ``An implicit but critical assumption for most carry trades is that the low-yielding currency appreciates significantly less than the interest differential,'' wrote Jens Nordvig, a New York- based economist with Goldman Sachs Group Inc. A carry trade occurs when an investor borrows in the currency of a low-yield nation and invests in the assets of a higher-yielding country. The yen's 10 percent fall versus the euro over the last year is making Europe ``increasingly worried,'' Luxembourg Prime and Finance Minister Jean-Claude Juncker told reporters in Brussels, where he is chairing a meeting of ministers from the 13-nation euro area. German Finance Minister Peer Steinbrueck said he is pressing fellow G-7 officials to cite the yen's decline as a problem when they meet next week. Betting on a Decline Akant said he will continue to short the yen, or bet on the currency's decline, and predicts it will drop to 125 per dollar by the end of March. The yen fell against 12 of 14 Asia/Pacific currencies tracked by Bloomberg. It gained against the Thai baht and the Australian dollar. The Japanese currency traded at 7.72041 against the South Korean won, near a nine-year low. Retailers' revenue declined a seasonally adjusted 0.2 percent from November, the trade ministry said in Tokyo. From a year earlier, sales decreased 0.3 percent, the biggest drop in eight months. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- so-called net shorts -- rose to a record 164,860 on Jan. 23, compared with net shorts of 138,146 a week earlier, according to figures from the Washington-based Commodity Futures Trading Commission released Jan. 26. Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of Jan. 23. Rebounding Volatility As the yen has weakened, volatility on yen options has rebounded from last month's 10-year low. Implied volatility for one-month options on the dollar-yen rate has climbed to 7.1 percent, after dropping to 6.05 percent on Dec. 25, the lowest since 1996. Implied volatility, which traders quote as part of pricing options, is a measure of expected swings in exchange rates. The BOJ's benchmark interest rate is 0.25 percent compared with the Federal Reserve's 5.25 percent target and the European Central Bank's 3.5 percent. Japan's rate is the lowest among industrialized nations. Barclays Capital, the fourth-biggest currency trader and the most accurate yen forecaster last year in Bloomberg surveys, cut its year-end estimate to 120 per dollar from 110. Standard Chartered also lowered its forecast to 120 from 114. RBC Capital Markets cut its year-end projection to 125 from 110. Traders have canceled bets on a U.S. interest-rate cut this quarter after reports last week showed orders for durable goods and new home sales rose more than economists forecast. Interest-rate futures for July show traders see a 2 percent chance the Fed will cut borrowing costs. The Fed next meets on Jan. 31. All 119 economists surveyed by Bloomberg expect no change in U.S. borrowing costs.

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