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BLBG: Yen Falls After RBA Fuels Speculation of Coordinated Rate Cuts
By Kim-Mai Cutler and Andrew MacAskill

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 series of cuts to ease a financial crisis.

The yen was little changed near 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. The euro rebounded after its biggest one-day drop against the yen since the common European currency's 1999 debut as the region's stocks and U.S. index futures rose.

``There is a degree of optimism that we will see coordinated rate cuts, which is increasing risk appetite and weighing on the yen,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. ``In the near term, if these drastic steps do come to fruition, then we could see a drop in the recent yen gains, which have been excessive.''

The yen fell to 138.64 per euro as of 9:08 a.m. in London from 137.50 yesterday, when it touched 135.05, the strongest since September 2005. Japan's currency was at 101.89 per dollar from 101.82. The euro was at $1.3566 from $1.3499. It touched $1.3444 yesterday, the lowest since August 2007, when the credit crisis started to gain momentum.

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.

Australia, New Zealand

The Australian dollar rose 0.2 percent to 73.72 yen, reversing an earlier 2.3 percent decline to 71.85 yen. The New Zealand dollar rose 0.1 percent to 64.68 yen after dropping as much as 1.9 percent.

``The size of the RBA's cut is enough to suggest that central banks may coordinate their monetary easing,'' 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 yen is being sold on signs that policy makers can relieve the stress we've seen in credit markets.''

The likelihood the world's largest economies are on the brink of a recession is raising speculation central banks will cut interest rates to revive growth. 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.

`Got to Go'

``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.''

European stocks rebounded after the RBA's rate decision. Europe's Dow Jones Stoxx 600 Index rose 1.7 percent after falling the most since 1987 yesterday.

The yen typically falls when aversion to higher-risk, higher-yielding assets eases, as traders put on so-called carry trades. In such transactions, investors get funds in nations with low borrowing costs and buy assets where returns are higher.

``It feels like yesterday we have reached some sort of short-term climax in this situation with yen strength,'' said John Hardy, the head of foreign-exchange strategy in London at Saxo Bank A/S, a Copenhagen-based bank specializing in currencies, stocks, bonds and derivatives. ``There is still potential as the credit crisis grinds on. But in terms of volatility, I don't think there is much left to go for the yen short term on the crosses.''

`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 system. 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

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 3.765 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: Kim-Mai Cutler in London at kcutler@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net