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BLBG: Yen Falls After RBA Fuels Speculation of Coordinated Rate Cuts
By Ron Harui and Stanley White

Oct. 7 (Bloomberg) -- The yen fell from a three-year high against the euro after the Reserve Bank of Australia lowered interest rates by the most since 1992, fueling speculation central banks plan a flurry of cuts to ease a financial crisis.

The yen also declined from a six-month high versus the dollar as Australian policy makers slashed borrowing costs by a full percentage point, double the reduction forecast by economists. Asian stocks and the Australian dollar pared losses as investors bet declines in benchmark interest rates will revive confidence in higher-yielding assets.

``The yen is being sold on signs that policy makers can relieve the stress we've seen in credit markets,'' said Akio Shimizu, chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan's largest publicly listed lender. ``The size of the RBA's cut is enough to suggest that central banks may coordinate their monetary easing.''

The yen traded at 139.39 per euro as of 7:38 a.m. in London from 137.50 yesterday, when it touched 135.05, the strongest since September 2005. Japan's currency was at 102.67 per dollar from 101.82. The euro was at $1.3579 from $1.3499. It touched $1.3444 yesterday, the lowest since August 2007, when the credit crisis started to gain momentum.

The Australian dollar tumbled 2.8 percent to 74.57 yen, paring an earlier 8.4 percent decline to 70.32 yen, the weakest since March 2003. The New Zealand dollar slid 2.1 percent to 65.23 yen after dropping as much as 6.8 percent.


The RBA lowered its overnight cash rate target to 6 percent from 7 percent, adding to last month's quarter-point reduction. Economists surveyed by Bloomberg News expected a cut to 6.5 percent. The Bank of Japan today left its benchmark rate unchanged at 0.5 percent.

The Bank of England meets on Oct. 9 to set borrowing costs, a day before finance ministers and central bankers from the Group of Seven nations gather in Washington to discuss the deepening credit-market crisis that has stalled bank lending.

``The Bank of England has been really resisting it for a long time but now they've got to go'' for lower rates, said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. ``The tide is certainly turning toward rate cuts that weren't on the agenda even a couple of weeks ago.''

Stocks trimmed losses in Asia after the RBA's rate decision. The MSCI Asia-Pacific Index of regional shares pared its decline to 1.2 percent from as much as 3.2 percent. In so-called carry trades, investors get funds in nations with low borrowing costs and buy assets where returns are higher.

`Focus on Europe'

Gains in the euro may be limited on speculation European authorities will fail to come up with a joint rescue plan for the region's beleaguered financial sector. The U.S. government has earmarked $700 billion to buy distressed assets from lenders following the collapse of banks including Lehman Brothers Holdings Inc.

``Let's focus on Europe and who's going to fail and how are they going to build it up,'' said Joseph Tan, chief economist for Asia at Credit Suisse Private Banking in Singapore. ``I wonder if they can come together and form a comprehensive package. The euro is negative against the dollar.''

European finance ministers meet at 9:30 a.m. in Luxembourg today. The German government and the country's banks and insurers agreed on a 50 billion euro ($67.9 billion) rescue of Hypo Real Estate Holding AG on the weekend after an earlier bailout plan faltered. BNP Paribas SA, France's biggest bank, agreed to take over Belgian units of Fortis after a government rescue of the lender failed.

Rate Cut Bets

The prospect of a global economic slump has caused investors to increase bets that the Federal Reserve and the European Central Bank will cut interest rates.

Futures on the Chicago Board of Trade show a 58 percent probability the Federal Open Market Committee will slash its 2 percent target rate for overnight bank loans by three-quarters of a percentage point to 1.25 percent at its Oct. 29 meeting. Traders saw no chance of a cut of that magnitude a month ago.

``Given the unstable nature of markets presently, debate on whether the FOMC will have to do an inter-meeting rate cut continues,'' Ashley Davies, a currency strategist at UBS AG in Singapore, wrote in a research note today. ``Our economists still believe as a base case that the Fed will wait until the next scheduled meeting on Oct. 28-29 for a 50 basis-point rate cut. However, a further unsettling deterioration in global markets could prompt an earlier move.''

Traders are betting the ECB will lower its benchmark interest rate. The implied yield on the March 2009 Euribor futures contract dropped to 3.760 percent from 3.815 percent yesterday.

German factory orders probably fell 4.7 percent in August from a year earlier, according to the median forecast of economists surveyed by Bloomberg. The Economy Ministry is due to release the report today.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net.